**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM10-KSB**

** **

**ANNUAL REPORT PURSUANT TOSECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended December  31, 2003**

 

**Commissionfile number 000-50645**

 

**THE BANKHOLDINGS**

(Exact name of Registrant as specified in itscharter)

 

| **NEVADA**                                                                                                                                    |   | **90-0071778**                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|
| State of Incorporation                                                                                                                        |   | IRS Employer Identification No |
|                                                                                                                                          |   |                           |
| **9990  Double R Boulevard, Reno, Nevada  89521**                                                                                        |
| Address of principal executive offices      Zip Code                                                                      |
|                                                                                                                                          |   |                           |
| **775-853-8600**                                                                                                                              |
| Registrant’s telephone number, including  area code                                                                                      |
|                                                                                                                                          |   |                           |
| Securities registered pursuant to Section 12(b) of the Act:  **None**                                                               |
|                                                                                                                                          |   |                           |
| Securities registered pursuant to Section 12(g) of the Act:  **Common  Stock, $0.01 Par Value, Warrants to Purchase Common Stock,** |

 

**Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.**

 

| **YES** |   | **ý** | **NO** |   | **o** |
|---------|--------|------------|--------|--------|-------|

 

**Check if disclosureof delinquent filers pursuant to Item 405 of Regulation S-B is not containedherein, and will not be contained, to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this form10-KSB.     **

 

**Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act)**

 

| **YES** |   | **o** | **NO** |   | **ý** |
|---------|--------|-------|--------|--------|------------|

 

**For the year endingDecember 31, 2003 the Registrant’s revenues were $6,143,000.**

 

**Asof March 1, 2004, the aggregate market value of the voting stock held bynon – affiliates of the Registrant was approximately $8.2 million based on theoffering circular price on that date of $11.00 per share.**

 

**Sharesof Common Stock held by each officer and director and each person owning morethan five percent of the outstanding Common Stock have been excluded in thatsuch persons may be deemed to be affiliates. This determination of the affiliate status is not necessarily aconclusive determination for other purposes.**

 

**Thenumber of shares of Common Stock of the registrant outstanding as ofMarch 1, 2004 was 1,405,930, par value $0.01.**

 

**DocumentsIncorporated by Reference:  Portions ofthe definitive proxy statement for the 2004 Annual Meeting of Shareholders tobe filed with Securities and Exchange Commission pursuant to SEC Regulation 14Aare incorporated by reference in Part III, Items 9-12.**

 

 

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**FORM 10-KSB**

 

**TABLE OF CONTENTS**

 
| **Part I**     |       |
|----------------|------------|
|           |       |
|           | Item 1.    | Business |   |
|           |       |   |   |
|           | Item 2.    | Properties |   |
|           |       |   |   |
|           | Item 3.    | Legal Proceedings |   |
|           |       |   |   |
|           | Item  4.   | Submission  of Matters to a Vote of Security Holders |   |
|           |       |
| **Part II**    |       |
|           |       |
|           | Item 5.    | Market for Common Equity, Related  Shareholder Matters and Small Business Issuer Purchases of Equity Securities |   |
|           |       |   |   |
|           | Item 6.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|           |       |   |   |
|           | Item 7.    | Consolidated Financial Statements |   |
|           |       |   |   |
|           | Item 8.    | Changes and Disagreements with  Accountants on Accounting and Financial Disclosure |   |
|           |       |   |   |
|           | Item 8A.   | Controls and Procedures |   |
|           |       |   |   |
| **Part III**   |       |
|           |       |   |   |
|           | Item 9.    | Directors and Executive Officers  of the Registrant |   |
|           |       |   |   |
|           | Item 10.   | Executive Compensation |   |
|           |       |   |   |
|           | Item 11.   | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters |   |
|           |       |   |   |
|           | Item 12.   | Certain Relationships and  Related Transactions |   |
|           |       |   |   |
|           | Item 13.   | Exhibits, and Reports on Form  8-K |   |
|           |       |   |   |
|           | Item 14.   | Principal Accountant Fees and  Services |   |
|           |       |   |   |
| **Appendix A** | **Tables** |   |
|           |       |
| **Signatures** |       |
|                |            |  |  |  |

 

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**FORWARD – LOOKING STATEMENTS**

 

ThisAnnual Report on Form 10-KSB includes forward-looking statements andinformation is subject to the “safe harbor” provisions of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934.  These forward-lookingstatements (which involve The Bank Holdings’ (the “Company’s”) plans, beliefsand goals, refer to estimates or use similar terms) involve certain risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements.  

 

Althoughwe believe that the anticipated results or other expectations reflected in ourforward-looking statements are based on reasonable assumptions, we can give noassurance that those results or expectations will be attained.  Forward-looking statements involve risks,uncertainties and assumptions (some of which are beyond our control), and as aresult actual results may differ materially from those expressed inforward-looking statements.  Factorsthat could cause actual results to differ from forward-looking statementsinclude, but are not limited to the following, as well as those discussedelsewhere herein:

 

•                  changes in the extensive laws, regulationsand policies governing financial holding companies and their subsidiaries couldalter our business environment or affect our operations;

 

•                  general economic or industry conditions couldbe less favorable than expected, resulting in a deterioration in creditquality, a change in the allowance for loan losses or a reduced demand forcredit or fee–based products and services;

 

•                  changes in the domestic interest rateenvironment could reduce net interest income and could increase credit losses;

 

•                  the conditions of the securities marketscould change, which could adversely affect, among other things, the value orcredit quality of our assets, the availability and terms of funding necessaryto meet our liquidity needs and our ability to originate loans and leases;

 

•                  competitive pressures could intensify andaffect our profitability, including as a result of continued industryconsolidation, the increased availability of financial services from non–banks,technological developments such as the internet or bank regulatory reform;

 

•                  the potential need to adapt to industrychanges in information technology systems, on which we are highly dependent,could present operational issues or require significant capital spending;

 

•                  our investments in our businesses and inrelated technology could require additional incremental spending, and might notproduce expected deposit and loan growth and anticipated contributions to ourearnings;

 

•                  acquisitions may result in large one–timecharges to income, may not produce revenue enhancements or cost savings atlevels or within time frames originally anticipated and may result inunforeseen integration difficulties; 

 

•                  acts or threats of terrorism and actionstaken by the United States or other governments as a result of such acts orthreats, including possible military action, could further adversely affectbusiness and economic conditions in the United States generally and in ourprincipal markets, which could have an adverse effect on our financialperformance and that of our borrowers and on the financial markets and theprice of our common stock.

 

•                  loss of key personnel

 

•                  operational risks and interruptions includingdata processing systems failure or fraud

 

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Youshould not place undue reliance on any forward–looking statements.  Forward–looking statements speak only as ifthe date they are made, and we undertake no obligation to update them in lightof new information or future events except to the extent required by federalsecurities laws.

 

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**PART I**

 

**ITEM 1.     BUSINESS**

 

**The Company**

 

**The Bank Holdings**

 

TheBank Holdings is a bank holding company incorporated in Nevada onJanuary 17, 2003 and registered under the Bank Holding Company Act of1956, as amended.  We conduct operationsthrough our sole subsidiary, Nevada Security Bank, a Nevada state-chartered commercialbank.  We and Nevada Security Bank areboth headquartered in Reno, Nevada at 9990 Double R Boulevard.  We acquired all of the outstanding shares ofNevada Security Bank on August 29, 2003. The Bank Holdings has no employees who are not also employees of NevadaSecurity Bank.

 

TheCompany’s principal sources of income are from interest earning assets held inportfolio, as well as dividends from the Bank, which are currentlyrestricted.  The Company intends toexplore supplemental sources of income in the future.

 

AtDecember 31, 2003, the Company had consolidated assets of $166.1 million,deposits of $148.7 million and shareholder’s equity of $10.9 million.  The Company’s liabilities include $3.125million in borrowings from affiliated parties, approximately $2.750 million ofwhich was contributed to Nevada Security Bank in order to facilitate itsgrowth.

 

Referencesherein to the “Company” include the Company and its consolidated subsidiaries,unless the context indicates otherwise.

 

**The Bank**

 

**Nevada Security Bank**

 

NevadaSecurity Bank was incorporated under the laws of the State of Nevada onFebruary 26, 2001, and was licensed by the Nevada Commissioner ofFinancial Institutions and commenced operations as a Nevada state-charteredbank on December 27, 2001.

 

NevadaSecurity Bank (NSB) operates from its head office in Reno, Nevada and itsbranch office in Incline Village, Nevada. Incline Village is located on the north shore of Lake Tahoe, Nevada,approximately 25 miles south of Reno, Nevada. In addition, NSB has received regulatory approval for opening a newbranch in the vicinity of Robb Drive and Mae Anne Avenue in Northwest Reno,Nevada.  We anticipate that branch willopen in approximately September 2004, as construction on the building inwhich it will be housed is only now commencing.  The addresses of the current full-service branch offices are asfollows:

 
| **Reno:** |   | 9990  Double R Boulevard |   | **Incline Village:** |   | 910  Tahoe Boulevard, Suite 101      |
|-----------|--------|--------------------------|--------|----------------------|--------|--------------------------------------|
|      |   | Reno,  Nevada 98521      |   |                 |   | Incline  Village, Nevada  89451 |
|      |   | (775)  853-8600          |   |                 |   | (775)  832-8100                      |

 

NevadaSecurity Bank also operates a loan production office under the name ofSilverado Funding which is located at 2893 Sunrise Boulevard, Suite 212, RanchoCordova, California  95742.  This office focuses on government guaranteedloans through the Small Business Administration, or SBA.

 

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Asan independent community commercial bank, Nevada Security Bank offers a fullrange of consumer and commercial banking services primarily to the business andprofessional community and individuals located in Washoe County.  In March 2003, Nevada Security Bankopened a loan production office in Rancho Cordova, California.  With the establishment of a loan productionoffice in Rancho Cordova, California, the bank expects to enhance its loangeneration activities and volumes.  Suchloans are also expected to contribute to greater levels of interest income, andincrease the number of government guaranteed loans saleable into the secondarymarket.  Though no absolute assurancecan be given that this will in fact, occur, it is anticipated to be the likelyoutcome of such loan production facility. In that office, the bank has three staff members and two commissionedloan production individuals who are supervised by the bank’s Credit Administrator,located in the Reno office.  Thisindividual has previously served as a chief credit officer, and president ofanother independent community bank and is well regarded in this area.  It is anticipated that this loan productioncapacity will be increased by the addition of SBA loan production staff in theReno market at a later date.

 

NevadaSecurity Bank offers a wide range of deposit instruments including personal andbusiness checking accounts and savings accounts, interest-bearing negotiableorder of withdrawal accounts, money market accounts and time certificates ofdeposit.  Most of Nevada Security Bank’sdeposits are attracted from individuals and from small and medium-sizedbusiness-related sources.  Its depositsare insured under the Federal Deposit Insurance Act up to applicable limits,and subject to regulations by that federal agency and to periodic examinationsof its operations and compliance by the FDIC and the Nevada FinancialInstitutions Division.  

 

Asof December 31, 2003 the Bank had 2,732 deposit accounts with balancestotaling approximately $148.7 million, compared to 1,651 deposit accounts withbalances totaling approximately $67.3 million at December 31, 2002.  We attract deposits through our customeroriented product mix, competitive pricing, convenient locations and mobile ATMfacility, all provided with the highest level of customer service.  Further, we offer shared ATM andpoint-of-sale (POS) networks to allow our customers access to national andinternational funds transfer networks. 

 

NevadaSecurity Bank also engages in a full complement of lending activities,including real estate mortgage, commercial and industrial, real estateconstruction, as well as agricultural and consumer loans, with particularemphasis on short and medium-term obligations. Nevada Security Bank’s loan portfolio is not concentrated in any oneindustry, although approximately 63% of Nevada Security Bank’s loans aresecured by real estate.  A loan may besecured (in whole or in part) by real estate even though the purpose of theloan is not to facilitate the purchase or development of real estate. 

 

Asof December 31, 2003, the principal areas in which we directed our lendingactivities, and the percentage of our total loan portfolio for which each ofthose areas was responsible, were as follows: (i) loans secured by real estate 63.2%; (ii) commercial and industrial(including SBA) loans, 31.6%, and (iii) consumer loans 5.2%.

 

Inaddition to the loan and deposit services Nevada Security Bank also offers awide range of specialized services designed to attract and meet the needs ofcommercial customers and account holders. These services include cashiers’ checks, travelers’ checks and foreigndrafts.  Nevada Security Bank does notoperate a trust department; however, it has made an arrangement with a privatetrust company to offer trust services to its customers on request.  Most of Nevada Security Bank’s businessoriginates from within Washoe County. Neither Nevada Security Bank’s business nor liquidity is seasonal, andthere has been no material effect upon Nevada Security Bank’s capitalexpenditures, earnings or competitive position as a result of federal, state orlocal environmental regulation.

 

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Wehave not engaged in any material research activities relating to thedevelopment of new products or services during the last two fiscal years,however, a substantial investment of time and capital has been directed to theimprovement of existing Bank services during the last twelve months.  Specifically, we have completed the testingof and implemented a commercial account internet banking capability to augmentour consumer internet banking facility, and we have tested and installed checkimaging capture devices in our branches to ensure compliance with Check 21implementation mandated by October 2004. Further, the officers and employees of the Bank are continually engagedin marketing activities, including the evaluation and development of newproducts and services to enable the Bank to retain and improve its competitiveposition in its service areas.  Forexample, alternatives for future electronic banking delivery systems arecurrently being evaluated in an effort to keep pace with evolving technology, andto continue to provide superior service to our various customer constituencies.

 

Ourmission is to be an organization of excellence by:

 

•                                          Providing quality banking products andservices, offered personally and professionally;

•                                          Committing our resources, energy andleadership to our communities;

•                                          Creating value for our shareholders;

•                                          Conducting our business with integrity andrespect for all; and

•                                          Fulfilling potential opportunities for growthand development

 

Ourbusiness strategy is to increase shareholder and franchise value by continuingto expand our geographic footprint through new branches, regional and/or loanproduction offices, and/or strategic acquisitions as they may become available.We expect to achieve these goals with our core group of experienced bankers,meeting the needs of our constituent shareholders, customer, and employeegroups. This will be accomplished by understanding our customers’ needs andexpectations and addressing each of them in a focused and responsive fashion,on a timely basis.

 

Further,we expect to constantly refine and redefine our asset and liability portfoliosthrough growth and product line diversification, increase our base of higheryielding assets as the economic cycle strengthens and improve our efficiency ratioas we leverage our talents and capital.     

 

**Competition**

 

Thebanking business in Nevada generally, and in the market areas served by NevadaSecurity Bank specifically, is highly competitive with respect to both loansand deposits.  Nevada Security Bankcompetes for loans and deposits with other commercial banks, savings and loanassociations, finance companies, money market funds, credit unions and otherfinancial institutions, including a number that are much larger than NevadaSecurity Bank.  As of June 30,2003, the most recent date for which data is available from the FDIC, therewere 74 banking offices, including 47 offices of 3 major chain banks (Bank ofAmerica, US Bank and Wells Fargo), operating within Nevada Security Bank’sprimary market areas in Washoe County. These three major chain banks were reported to have held 56.5% of thedeposits in Washoe County at June 30, 2003.  Nevada Security Bank’s share of such market at that date wasreported to be 0.73% of the County’s $5.1 billion deposit base.  There has been increased competition fordeposit and loan business over the last several years as a result ofderegulation.  Many of the majorcommercial banks operating in Nevada Security Bank’s market areas offer certainservices, such as trust and international banking services, which NevadaSecurity Bank does not offer directly. Additionally, banks with larger capitalization have larger lendinglimits and are thereby able to serve larger customers.  At December 31, 2003, the legal lendinglimit for Nevada Security Bank was approximately $3.3 million. 

 

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Toa great extent, the super-regional state chain banks also have the advantage ofgeographically diffused name recognition and may actively pursue wide-rangingadvertising campaigns and branding tactics which are not available to a localcommunity institution, due to economies of scale.

 

Further,other competitors have entered banking markets with focused products targetedat specific highly profitable customer segments.  Many competitors are able to compete across geographic boundariesthat are blocked to us and provide customers with alternatives to traditionalbanking services and nearly all significant products.  Indeed, within the past year, a well-recognized brokerage firmhas established their own bank in the Reno market and these competitive trendsare likely to continue.

 

Inaddition to competition from insured depository institutions, principalcompetitors for deposits and loans have been mortgage brokerage companies,insurance companies, brokerage houses, credit card companies and even retailestablishments offering investment vehicles such as mutual funds, annuities andmoney market funds, as well as traditional bank-like services such as checkaccess to money market funds, or cash advances on credit card accounts. 

 

Inorder to compete with the other financial institutions in its principalmarketing area, Nevada Security Bank relies principally upon local promotionalactivities, personal contacts by its officers, directors and employees, andclose connections with its community.

 

TheBank primarily targets its general commercial banking services to businesses,professional concerns, developers and individuals residing in or doing businessin the greater Reno/Sparks and Incline Village communities.  As an independent, community bank,management emphasizes quality service, efficiency and personal attention to theneeds of its customers.  The Bank’s widerange of deposit accounts is designed to attract business, professionals andindividuals as depositors.  Managementhas hired competent and professional banking staff in its branches to focus onthe financial needs of its customers. Various promotional opportunities havebeen made available to customers through newspaper advertising and flyers. 

 

TheBank’s full complement of lending products includes commercial lines of creditand term loans, credit lines to individuals, checking overdraft credit lines,professional loans, SBA loans, equipment loans, accounts receivable financingand real estate and construction loans. The Bank offers attractive andcompetitive programs for lot loans, owner-builders of personal residences, andcommercial term real estate loan financing. Consumer loans offered include auto loans, home improvement loans, andhome equity lines of credit.  Toaccommodate borrowers with loan requests which exceed the Bank’s legal lendinglimit, the Bank has established participation arrangements with correspondentbanks to facilitate approval and funding. Management has hired a professional and competent lending staffcomprised of five commercial and real estate lenders with substantial years ofknowledge, experience and expertise in the Reno/Sparks and Incline Villagemarkets.  

 

Theseindividuals have expertise in consumer, real estate and commercial lending, inaddition to current knowledge of government lending programs, and all areas ofdeposit management facilities.  Whencompeting one-on-one with the chain banks, we feel our strength lies in ourcapabilities at the individual level.

 

TheBank offers other services including an internet banking alternative, cashmanagement, credit cards, wire transfers, ATM networks, courier, nightdepository facilities, safe deposit boxes, etc.  All services stress convenient, personal and efficient servicesfor the Bank’s clientele.  

 

Incertain instances, we have been unable to compete for deposit acquisitionbusiness due solely to our lack of long-term operating history or lack ofsustained profitability.  In thesesituations, there are no alternatives

 

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availableto us.  However, we may have otherspecialized services to overcome some objections to our recently charteredstatus, such as those available from correspondent banks, the highlytechnological alternative delivery channels available through our website, andthe ever-present capabilities of our well-seasoned and extraordinarily capablestaff.

 

TheBank’s Board of Directors, management and staff are active in local civic,charitable and community organizations and events, soliciting businessreferrals and generating profitable business opportunities for the Bank.  The Bank relies on its independent status,flexibility and timely response to provide greater personal service tocustomers.  The Bank emphasizes personalcontacts with potential customers by management, the Board of Directors andstaff to develop local promotional activities and to develop specialized orstreamlined services.  The Bank pridesitself on being a local bank for local people and businesses.  

 

**Employees**

 

Asof December 31, 2003, the Company had 33 full–time and 3 part–timeemployees.  On a full–time equivalentbasis, the Company’s staff level was 38.2 at December 31, 2003, ascompared to 28.5 at December 31, 2002. Staff was added during 2003 in the course of regular bank growth.  None of our employees is represented by aunion or covered by a collective bargaining agreement.  Management of the Company believes itsemployee relations are satisfactory.

 

**Recent Accounting Pronouncements**

 

OnNovember 25, 2003, FASB’s Emerging Issues Task Force (EITF) ratified aconsensus decision on new disclosure requirements related to unrealized losseson investment securities applicable to fiscal years ending afterDecember 15, 2003 requiring institutions covered by FAS 115 to includesaid disclosure in 2003 annual reports. Unrealized losses on investment securities must be summarized in tableformat, distinguishing between securities in a continuous unrealized lossposition for 12 months or more and securities in a continuous unrealized lossposition for 12 months or less, including aggregate unrealized losses ofsecurities whose fair values are below book values as of the reporting date andthe aggregate fair value of securities whose fair values are below book valuesas of the reporting date.  Additionalinformation recommended for inclusion in narrative form includes the nature ofthe investment, the cause(s) of impairment(s), the number of investmentpositions that are in an unrealized loss position, and the severity andduration of impairment(s).

 

**Regulation and Supervision**

 

Thefollowing discussion sets forth certain of the material elements of thesignificant regulatory framework by federal and state regulatory agenciesapplicable to bank holding companies and their subsidiaries and providescertain specific information relevant to the Company.  The regulatory framework is intended primarily for the protectionof depositors and the insurance funds administered by the FDIC and not for theprotection of security holders.  To theextent that the following information describes statutory and regulatoryprovisions, it is qualified in its entirety by reference to the particular statutoryand regulatory provisions.  A change inapplicable status, regulations or regulatory policy may have a material effecton our business. The following discussion of statutes and regulations is only abrief summary and does not purport to be complete.  This discussion is qualified in its entirety by reference to suchstatutes and regulations.  No assurancecan be given that such statues or regulations will not change in the future.

 

**The Company**

 

TheCompany is subject to the periodic reporting requirements of Section 13 ofthe Securities Exchange Act of 1934 (the “Exchange Act”) which require theCompany to file annual, quarterly and other current reports with the Securitiesand Exchange Commission (the “SEC”). The Company is also subject to additional regulations including, but notlimited to, the proxy and tender offer rules promulgated by the SEC underSections 13 and 14 of the Exchange Act; the reporting requirements ofdirectors, executive officers and

 

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principleshareholders regarding transactions in the Company’s Common Stock andshort–swing profits rules promulgated by the SEC under Section 16 of theExchange Act; and certain additional reporting requirements by principleshareholders of the Company promulgated by the SEC under Section 13 of theExchange Act.

 

TheCompany is a bank holding company within the meaning of the Bank HoldingCompany Act of 1956 and is registered as such with the Federal ReserveBoard.  A bank holding company isrequired to file with the Federal Reserve Board annual reports and otherinformation regarding its business operations and those of itssubsidiaries.  It is also subject toexamination by the Federal Reserve Board and is required to obtain FederalReserve Board approval before acquiring, directly or indirectly, ownership orcontrol of any voting shares of any bank if, after such acquisition, it woulddirectly or indirectly own or control more than 5% of the voting stock of thatbank, unless its already owns a majority of the voting stock of that bank.

 

TheFederal Reserve Board has by regulation determined certain activities in whicha bank holding company may or may not conduct business.  A bank holding company must engage, withcertain exceptions, in the business of banking or managing or controlling banksor furnishing services to or performing services for its subsidiary banks.  The permissible activities and affiliationsof certain bank holding companies have recently been expanded.  (See “Financial Modernization Act” below.)

 

TheCompany and Bank are deemed to be affiliates of each other within the meaningset forth in the Federal Reserve Act and are subject to Sections 23A and 23B ofthe Federal Reserve Act.  This means,for example, that there are limitations on loans by the Bank to affiliates, andthat all affiliate transactions must satisfy certain limitations and otherwisebe on terms and conditions at least as favorable to the Bank as would beavailable for non–affiliates.

 

TheFederal Reserve Board has a policy that bank holding companies must serve as asource of financial and managerial strength to their subsidiary banks.  It is the Federal Reserve Bank’s positionthat bank holding companies should stand ready to use their available resourcesto provide adequate capital to their subsidiary banks during periods offinancial stress or adversity.  Bankholding companies should also maintain the financial flexibility andcapital–raising capacity to obtain additional resources for assisting theirsubsidiary banks.

 

TheFederal Reserve Board also has the authority to regulate bank holding companydebt, including the authority to impose interest rate ceilings and reserverequirements on such debt.  Undercertain circumstances, the Federal Reserve Board may require The Company tofile written notice and obtain its approval prior to purchasing or redeemingThe Company’s equity securities.

 

**The Bank**

 

Asa Nevada state–chartered bank whose accounts are insured by the FDIC up to amaximum of $100,000 per depositor, the Bank is subject to regulation,supervision and regular examination by the Department of Financial Institutions(the “DFI”) and the FDIC.  In addition,while the Bank is not a member of the Federal Reserve System, it is subject tocertain regulations of the Federal Reserve Board.  The regulations of these agencies govern most aspects of theBank’s business, including the making of periodic reports by the Bank, and theBank’s activities relating to dividends, investments, loans, borrowings,capital requirements, certain check–clearing activities, branching, mergers andacquisitions, reserves against deposits and numerous other areas.  Supervision, legal action and examination ofthe Bank by the FDIC is generally intended to protect depositors and is notintended for the protection of shareholders.

 

Theearnings and growth of the Bank are largely dependent on its ability tomaintain a favorable differential or “spread” between the yield on itsinterest–earning assets and the rate paid on its deposits and other interest–bearingliabilities.  As a result, the Bank’sperformance is influenced by general economic

 

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conditions,both domestic and foreign, the monetary and fiscal policies of the federalgovernment, and the policies of the regulatory agencies, particularly theFederal Reserve Board.  The FederalReserve Board implements national monetary policies (such as seeking to curbinflation and combat recession) by its open–market operations in United StatesGovernment securities, by adjusting the required level of reserves forfinancial institutions subject to its reserve requirements and by varying thediscount rate applicable to borrowings by banks that are members of the FederalReserve System.  The actions of theFederal Reserve Board in these areas influence the growth of bank loans,investments and deposits and also affect interest rates charged on both loansand deposits.  The nature and impact ofany future changes in monetary policies cannot be predicted.

 

**Capital Adequacy Requirements**

 

TheCompany and the Bank are subject to the regulations of the Federal ReserveBoard and the FDIC, respectively, governing capital adequacy.  Those regulations incorporate bothrisk–based and leverage capital requirements. Each of the federal regulators has established risk–based and leveragecapital guidelines for the banks or bank holding companies it regulates, whichset total capital requirements and define capital in terms of “core capitalelements,” or Tier 1 capital; and “supplemental capital elements,” or Tier 2capital.  Tier 1 capital is generallydefined as the sum of the core capital elements less goodwill and certain otherdeductions, notably the unrealized net gains or losses (after tax adjustments)on available for sale investment securities carried at fair market value.  The following items are defined as corecapital elements:  (i) commonshareholders’ equity; (ii) qualifying non–cumulative perpetual preferred stockand related surplus (not to exceed 25% of tier 1 capital); and (iii) minorityinterest in the equity of consolidated subsidiaries.  Supplementary capital elements include:  (i) allowance for loan and lease losses (but not more than 1.25%of an institution’s risk–weighted assets); (ii) perpetual preferred stock andrelated surplus not qualifying as core capital; (iii) hybrid capitalinstruments, perpetual debt and mandatory convertible debt instruments; and(iv) term subordinated debt and intermediate–term preferred stock and relatedsurplus.  The maximum amount ofsupplemental capital elements which qualifies as Tier 2 capital is limited to100% of Tier 1 capital, net of goodwill.

 

Theminimum required ratio of qualifying capital to total risk–weighted assets is8.0% (“Total Risk–Based Capital Ratio”), at least one–half of which must be inthe form of Tier 1 capital, and the minimum required ratio of Tier 1 capital tototal risk–weighted assets is 4.0% (“Tier 1 Risk–Based Capital Ratio”).  Risk–based capital ratios are calculated toprovide a measure of capital that reflects the degree of risk associated with abanking organization’s operations for both transactions reported on the balancesheet as assets, and transactions, such as letters of credit and recoursearrangements, which are recorded as off–balance sheet items.  Under the risk–based capital guidelines, thenominal dollar amounts of assets and credit–equivalent amounts of off–balancesheet items are multiplied by one of several risk adjustment percentages, whichrange from 0% for assets with low credit risk, such as certain U.S. Treasurysecurities, to 100% for assets with relatively high credit risk, such asbusiness loans.  As of December 31,2003 and 2002, the Bank’s Total Risk–Based Capital ratios were 14.64% and23.31%, respectively, and its Tier 1 Risk–Based Capital Ratios were 13.75% and22.76%, respectively.

 

Therisk–based capital requirements also take into account concentrations of credit(i.e., relatively large proportions of loans involving one borrower, industry,location, collateral or loan type) and the risks of “non–traditional”activities (those that have not customarily been part of the bankingbusiness).  The regulations requireinstitutions with high or inordinate levels of risk to operate with higherminimum capital standards, and authorize the regulators to review aninstitution’s management of such risks in assessing an institution’s capitaladequacy.

 

Additionally,the risk–based capital regulations also include exposure to interest rate riskas a factor that the regulators will consider in evaluation a bank’s capitaladequacy.  Interest rate risk is theexposure of a bank’s current and future earnings and equity capital arisingfrom adverse movements in interest rates. While interest risk is inherent in a bank’s role as financialintermediary, it introduces volatility to earnings and to the economic value ofthe bank.

 

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TheFDIC and the Federal Reserve Board also require the maintenance of a leveragecapital ratio designed to supplement risk–based capital guidelines.  Banks and bank holding companies that havereceived the highest rating of the five categories used by regulators to ratebanks and are not anticipating or experiencing any significant growth mustmaintain a ratio of Tier 1 capital (net of all intangibles) to adjusted totalassets (“Leverage Capital Ratio”) of at least 3%.  All other institutions are required to maintain a leverage ratioof at least 100 to 200 basis points above the 3% minimum, for a minimum of 4%to 5%.  Pursuant to federal regulations,banks must maintain capital levels commensurate with the level of risk to whichthey are exposed, including the volume and severity of problem loans, andfederal regulators may, however, set higher capital requirements when a bank’sparticular circumstances warrant.  TheBank’s Leverage Capital Ratio was 8.87% and 15.17% on December 31, 2003and 2002 respectively.  As of December 31,2003, the Company’s leverage capital ratios was 7.06%, exceeding regulatoryminimums.

 

Formore information on the Company’s capital, see Part II, Item 6, Management’sdiscussion and Analysis of Financial Condition and Results of Operation–CapitalResources.  Risk–based capital ratiorequirements are discussed in greater detail in the following section.

 

**Prompt Corrective Action Provisions**

 

Federallaw requires each federal banking agency to take prompt corrective action toresolve the problems of insured financial institutions, including but notlimited to those that fall below one or more prescribed minimum capitalratios.  The federal banking agencieshave by regulation defined the following five capital categories:  “well–capitalized” (Total Risk–Based CapitalRatio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%);“adequately capitalized” (Total Risk–Based Capital Ratio of 8%; Tier 1Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4%) (or 3% if theinstitution receives the highest rating from its primary regulator);“undercapitalized” (Total Risk–Based Capital Ratio of less than 8%; Tier 1Risk-Based Capital Ratio of less than 4%; and Leverage Ratio of less than 4%)(or 3% if the institution receives the highest rating from its primaryregulator); “significantly undercapitalized” (Total Risk–Based Capital Ratio ofless than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; and LeverageRatio of less than 3%); and “critically undercapitalized” (tangible equity tototal assets less than 2%).  A bank maybe treated as though it were in the next lower capital category if after noticeand the opportunity for a hearing, the appropriate federal agency finds anunsafe or unsound condition or practice so warrants, but no bank may be treatedas “critically undercapitalized” unless its actual capital ratio warrants suchtreatment.

 

Inaddition to measures taken under the prompt corrective action provisions,insured banks may be subject to potential actions by the federal regulators forunsafe or unsound practices in conducting their businesses or for violations ofany law, rule, regulation or any condition imposed in writing by the agency orany written agreement with the agency. Enforcement actions may include the issuance of cease and desist orders,termination of insurance of deposits (in the case of a bank), the imposition ofcivil money penalties, the issuance of directives to increase capital, formaland informal agreements, or removal and prohibition orders against“institution–affiliated” parties.

 

**Safety and Soundness Standards**

 

Thefederal banking agencies have also adopted guidelines establishing safety andsoundness standards for all insured depository institutions.  Those guidelines relate to internalcontrols, information systems, internal audit systems, loan underwriting anddocumentation, compensation and interest rate exposure.  In general, the standards are designed toassist the federal banking agencies in identifying and addressing problems atinsured depository institutions before capital becomes impaired.  If an institution fails to meet these standards,the appropriate federal banking agency may require the institution to submit acompliance plan and institute enforcement proceedings if an acceptablecompliance plan is not submitted. 

 

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**Premiums for Deposit Insurance**

 

TheFDIC regulations also implement a risk–based premium system, whereby insureddepository institutions are required to pay insurance premiums depending ontheir risk classification.  Under thissystem, insured banks are categorized into one of three capital categories(well capitalized, adequately capitalized, and undercapitalized) and one ofthree supervisory categories based on federal regulatory evaluations.  The three supervisory categories are:  Financially sound with only a few minorweaknesses (Group A), demonstrated weaknesses that could result in significantdeterioration (Group B), and poses a substantial probability of loss (GroupC).  The capital ratios used by the FDICto define well capitalized, adequately capitalized and undercapitalized are thesame in the FDIC’s prompt corrective action regulations.  The current base assessment rates (expressedas cents per $100 of deposits) are summarized as follows:

 
|                   |   | **Group A** |   | **Group B** |   | **Group C** |   |
|------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Well Capitalized       |   | 0           |   | 3           |   | 12          |   |
| Adequately Capitalized |   | 3           |   | 10          |   | 24          |   |
| Undercapitalized       |   | 10          |   | 24          |   | 27          |   |

 

Inaddition, banks must pay an amount toward the retirement of the FinancingCorporation bonds issued in the 1980’s to assist in the recover of the savingsand loan industry.  This amountfluctuates but for the first quarter of 2004 is 1.68 cents per $100 of insureddeposits.

 

**Community Reinvestment Act**

 

TheBank is subject to certain requirements and reporting obligations involvingCommunity Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate therecord of a financial institution in meeting the credit needs of its localcommunities, including low and moderate income neighborhoods.  The CRA further requires the agencies totake a financial institution’s record of meeting its community credit needsinto account when evaluating applications for, among other things, domesticbranches, consummating mergers or acquisitions, of holding companyformations.  In measuring a bank’scompliance with its CRA obligations, the regulators utilize a performance–basedevaluation system which bases CRA ratings on the bank’s actual lending serviceand investment performance, rather than on the extent to which the institutionconducts needs assessments, documents community outreach activities or complieswith other procedural requirements.  Inconnection with its assessment of CRA performance, the FDIC assigns a rating of“outstanding,” “satisfactory,” or “substantial noncompliance.”  The Bank was examined for CRA compliance inNovember 2003 when it received an “Outstanding” CRA Assessment rating.

 

**Other Consumer Protection Laws andRegulations**

 

Thebank regulatory agencies are increasingly focusing attention on compliance withconsumer protection laws and regulations. Examination and enforcement has become intense, and banks have beenadvised to carefully monitor compliance with various consumer protection lawsand regulations.  The federalInteragency Task Force on Fair Lending issued a policy statement on discriminationin home mortgage lending describing three methods that federal agencies willuse to prove discrimination:  overtevidence of discrimination, evidence of disparate treatment, and evidence ofdisparate impact.  In addition to CRAand fair lending requirements, the Bank is subject to numerous other federalconsumer protection statutes and regulations. Due to heightened regulatory concern related to compliance with consumerprotection laws and regulations generally, the Bank may incur additional compliancecosts or be required to expend additional funds for investments in the localcommunities it serves.

 

**Interstate Banking and Branching**

 

TheRiegle – Neal Interstate Banking and Branching Efficiency Act of 1994 (the“Interstate Banking Act”) regulates the interstate activities of banks and bankholding companies and establishes a framework for nationwide interstate bankingand branching.  Since June 1, 1997,a bank in one state has generally been permitted to merge with a bank inanother state without the need for explicit state law authorization.

 

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However,states were given the ability to prohibit interstate mergers with banks intheir own state by “opting–out” (enacting state legislation applying equalityto all out–of–state banks prohibiting such mergers) prior to June 1, 1997.

 

Since1995, adequately capitalized and managed bank holding companies have beenpermitted to acquire banks located in any state, subject to twoexceptions:  first, any state may stillprohibit bank holding companies from acquiring a bank which is less that fiveyears old; and second, no interstate acquisition can be consummated by a bankholding company if the acquirer would control more than 10% of the depositsheld by insured depository institutions nationwide or 30% or more of thedeposits held by insured depository institutions in any state in which thetarget bank has branches.

 

Abank may establish and operate de novo branches in any state in which the bankdoes not maintain a branch if that state has enacted legislation to expresslypermit all out–of–state banks to establish branches in that state.

 

Thechanges effected by the Interstate Banking Act have increased competition inthe environment in which the Bank operates to the extent that out–of–statefinancial institutions directly or indirectly enter the Bank’s marketareas.  It appears that the InterstateBanking Act has contributed to the accelerated consolidation of the bankingindustry.  While many large out–of–statebanks have already entered the Nevada market as a result of this legislation,it is not possible to predict the precise impact of this legislation on theBank and the Company and the competitive environment in which they operate.

 

**Financial Modernization Act**

 

InNovember 1999, the Gramm-Leach-Bliley Act, or the GLB Act, became law,significantly changing the regulatory structure and oversight of the financialservices industry.  EffectiveMarch 11, 2000, the GLB Act repealed the provisions of the Glass-SteagallAct that restricted banks and securities firms from affiliating.  It also revised the BHCA to permit a“qualifying” bank holding company, called a financial holding company, toengage in a full range of financial activities, including banking, insurance,securities, and merchant banking activities. It also permits qualifying bank holding companies to acquire many typesof financial firms without the FRB’s prior approval.

 

TheGLB Act thus provides expanded financial affiliation opportunities for existingbank holding companies and permits other financial services providers toacquire banks and become bank holding companies without ceasing any existingfinancial activities.  Previously, abank holding company could only engage in activities that were “closely relatedto banking.”  This limitation no longerapplies to bank holding companies that qualify to be treated as financialholding companies.  To qualify as afinancial holding company, a bank holding company’s subsidiary depositoryinstitutions must be well-capitalized, well-managed and have at least a“satisfactory” Community Reinvestment Act examination rating.  “Nonqualifying” bank holding companies arelimited to activities that were permissible under the BHCA as ofNovember 11, 1999.

 

Alsoeffective on March 11, 2000, the GLB Act changed the powers of nationalbanks and their subsidiaries, and made similar changes in the powers of statebanks and their subsidiaries.  Nationalbanks may now underwrite, deal in and purchase state and local revenuebonds.  A subsidiary of a national bankmay now engage in financial activities that the bank cannot itself engage in,except for general insurance underwriting and real estate development andinvestment.  In order for a subsidiaryof a national bank to engage in these new financial activities, the nationalbank and its depository institution affiliates must be “well capitalized,” haveat least “satisfactory” general, managerial and Community Reinvestment Actexamination ratings, and meet other qualification requirements relating tototal assets, subordinated debt, capital, risk management, and affiliatetransactions.  Subsidiaries of statebanks can exercise the same powers as national bank subsidiaries if they satisfythe same qualifying rules that apply to national banks, except thatstate-chartered

 

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banksdo not have to satisfy the statutory managerial and debt rating-requirements ofnational banks.

 

TheGLB Act also reformed the overall regulatory framework of the financialservices industry.  In order toimplement its underlying purposes, the GLB Act preempted state laws that wouldrestrict the types of financial affiliations that are authorized or permittedunder the GLB Act, subject to specified exceptions for state insurance laws andregulations.  With regard to securitieslaws, effective May 12, 2001, the GLB Act removed the blanket exemptionfor banks from being considered brokers or dealers under the SecuritiesExchange Act of 1934 and replaced it with a number of more limitedexemptions.  Thus, previously exemptedbanks may become subject to the broker-dealer registration and supervisionrequirements of the Securities Exchange Act of 1934.  The exemption that prevented bank holding companies and banksthat advise mutual funds from being considered investment advisers under theInvestment Advisers Act of 1940 was also eliminated.

 

Separately,the GLB Act imposes customer privacy requirements on any company engaged infinancial activities.  Under theserequirements, a financial company is required to protect the security andconfidentiality of customer nonpublic personal information.  Also, for customers that obtain a financialproduct such as a loan for personal, family or household purposes, a financialcompany is required to disclose its privacy policy to the customer at the timethe relationship is established and annually thereafter, including its policiesconcerning the sharing of the customer’s nonpublic personal information withaffiliates and third parties.  If anexemption is not available, a financial company must provide consumers with anotice of its information sharing practices that allows the consumer to rejectthe disclosure of its nonpublic personal information to third parties.  Third parties that receive such informationare subject to the same restrictions as the financial company on the reuse ofthe information.  Finally, a financialcompany is prohibited from disclosing an account number or similar item to athird party for use in telemarketing, direct mail marketing or other marketingthrough electronic mail.

 

**Sarbanes-Oxley Act**

 

DuringJuly 2002, President Bush signed into law the Sarbanes-Oxley Act of2002.  The purpose of the Sarbanes-OxleyAct is to protect investors by improving the accuracy and reliability ofcorporate disclosures made pursuant to the securities laws, and for otherpurposes.

 

TheSarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit aregistered public accounting firm from performing specified nonaudit servicescontemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer withresponsibility for the appointment, compensation, and oversight of any registeredpublic accounting firm employed to perform audit services.  It requires each committee member to be amember of the board of directors of the issuer, and to be otherwiseindependent.  The Sarbanes-Oxley Act furtherrequires the chief executive officer and chief financial officer of an issuerto make certain certifications as to each annual or quarterly report.

 

Inaddition, the Sarbanes-Oxley Act requires officers to forfeit certain bonusesand profits under certain circumstances. Specifically, if an issuer is required to prepare an accountingrestatement due to the material noncompliance of the issuer as a result ofmisconduct with any financial reporting requirement under the securities laws,the chief executive officer and chief financial officer of the issuer shall berequired to reimburse the issuer for (1) any bonus or other incentive-based orequity-based compensation received by that person from the issuer during the12-month period following the first public issuance or filing with the SEC ofthe financial document embodying such financial reporting requirement; and (2)any profits realized from the sale of securities of the issuer during that12-month period.

 

TheSarbanes-Oxley Act also instructs the SEC to require by rule:

 

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•                                          disclosure of all material off-balance sheettransactions and relationships that may have a material effect upon thefinancial status of an issuer; and

 

•                                          the presentation of pro forma financialinformation in a manner that is not misleading, and which is reconcilable withthe financial condition of the issuer under generally accepted accountingprinciples.

 

TheSarbanes-Oxley Act also prohibits insider transactions in the company’s stockheld within its pension plans during lock out periods, and any profits on suchinsider transactions are to be disgorged. In addition, there is a prohibition of company loans to its executives,except in certain circumstances.  TheSarbanes-Oxley Act also provides for a mandated internal control report andassessment with the annual report and an attestation and a report on suchreport by the company’s auditor.  TheSEC also requires the company to issue a code of ethics for senior financialofficers of the company.  Further, theSarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to10 years for securities fraud.

 

**Regulation W**  

 

TheFRB on October 31, 2002 approved a final Regulation W that comprehensivelyimplements sections 23A and 23B of the Federal Reserve Act.  Sections 23A and 23B and Regulation Wrestrict loans by a depository institution to its affiliates, asset purchasesby a depository institution from its affiliates, and other transactions betweena depository institution and its affiliates. Regulation W unifies in one public document the FRB’s interpretations ofsections 23A and 23B.  Regulation W hadan effective date of April 1, 2003.

 

**Regulatory Capital Treatment ofEquity Investments**

 

InDecember of 2001 and January of 2002, the OCC, the FRB and the FDICadopted final rules governing the regulatory capital treatment of equityinvestments in nonfinancial companies held by banks, bank holding companies andfinancial holding companies.  The finalrules became effective on April 1, 2002. The new capital requirements apply symmetrically to equity investmentsmade by banks and their holding companies in nonfinancial companies under thelegal authorities specified in the final rules.  Among others, these include the merchant banking authoritygranted by the Gramm-Leach-Bliley Act and the authority to invest in smallbusiness investment companies (“SBICs”) granted by the Small BusinessInvestment Act.  Covered equityinvestments will be subject to a series of marginal Tier 1 capital charges,with the size of the charge increasing as the organization’s level ofconcentration in equity investments increases. The highest marginal charge specified in the final rules requires a 25percent deduction from Tier 1 capital for covered investments that aggregatemore than 25 percent of an organization’s Tier 1 capital.  Equity investments through SBICs will beexempt from the new charges to the extent such investments, in the aggregate,do not exceed 15 percent of the banking organization’s Tier 1 capital.  The new charges would not apply toindividual investments made by banking organizations prior to March 13,2000.  Grandfathered investments made bystate banks under section 24(f) of the Federal Deposit Insurance Act alsoare exempted from coverage.

 

**USA Patriot Act**  

 

Theterrorist attacks in September 2001, have impacted the financial servicesindustry and led to federal legislation that attempts to address certain issuesinvolving financial institutions.  OnOctober 26, 2001, President Bush signed into law the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept andObstruct Terrorism Act of 2001 (“USA Patriot Act”).

 

Partof the USA Patriot Act is the International Money Laundering Abatement andFinancial Anti-Terrorism

 

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Actof 2001 (“IMLA”).  IMLA authorizes theSecretary of the Treasury, in consultation with the heads of other governmentagencies, to adopt special measures applicable to banks, bank holdingcompanies, and/or other financial institutions.  These measures may include enhanced recordkeeping and reportingrequirements for certain financial transactions that are of primary moneylaundering concern, due diligence requirements concerning the beneficialownership of certain types of accounts, and restrictions or prohibitions oncertain types of accounts with foreign financial institutions.

 

Amongits other provisions, IMLA requires each financial institution to: (i)establish an anti-money laundering program; (ii) establish due diligencepolicies, procedures and controls with respect to its private banking accountsand correspondent banking accounts involving foreign individuals and certainforeign banks; and (iii) avoid establishing, maintaining, administering, ormanaging correspondent accounts in the United States for, or on behalf of, aforeign bank that does not have a physical presence in any country.  In addition, IMLA contains a provisionencouraging cooperation among financial institutions, regulatory authorities andlaw enforcement authorities with respect to individuals, entities andorganizations engaged in, or reasonably suspected of engaging in, terroristacts or money laundering activities. IMLA expands the circumstances under which funds in a bank account maybe forfeited and requires covered financial institutions to respond undercertain circumstances to requests for information from federal banking agencieswithin 120 hours.  IMLA also amends theBHCA and the Bank Merger Act to require the federal banking agencies toconsider the effectiveness of a financial institution’s anti-money launderingactivities when reviewing an application under these acts.  IMLA became effective July 23, 2002. 

 

**Merchant Banking Investments**

 

TheFRB and the Secretary of the Treasury in January 2001 jointly adopted a finalrule governing merchant banking investments made by financial holdingcompanies.  The rule implementsprovisions of the Gramm-Leach-Bliley Act discussed below that permit financialholding companies to make investments as part of a bona fide securitiesunderwriting or merchant or investment banking activity.  The rule provides that a financial holdingcompany may not, without FRB approval, directly or indirectly acquire anyadditional shares, assets or ownership interests or make any additional capitalcontribution to any company the shares, assets or ownership interests of whichare held by the financial holding company subject to the rule if the aggregatecarrying value of all merchant banking investments held by the financialholding company exceeds:

 

•                                          30 percent of the Tier 1 capital of thefinancial holding company, or

 

•                                          after excluding interests in private equityfunds, 20 percent of the Tier 1 capital of the financial holding company.

 

Aseparate final rule will establish the capital charge of merchant bankinginvestments for the financial holding company. 

 

**Other Pending and ProposedLegislation**

 

Otherlegislative and regulatory initiatives which could affect the Company, the Bankand the banking industry in general are pending, and additional initiatives maybe proposed or introduced before the United States Congress, the Nevadalegislature and other governmental bodies in the future.  Such proposals, if enacted, may furtheralter the structure, regulation, and competitive relationship among financialinstitutions, and may subject the Bank to increased regulation, disclosure, andreporting requirements.  In addition,the various banking regulatory agencies often adopt new rules and regulationsto implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation orregulations may be enacted or the extent to which the business of the Companyor the Bank would be affected thereby.

 

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**Other Information Concerning theCompany**

 

TheCompany holds no material patents, trademarks, licenses, franchises orconcessions.  No expenditures were madeby the Company since inception on material research activities relating to thedevelopment of services or the improvement of existing services.  Based upon present business activities,compliance with federal, state and local provisions regulating discharge ofmaterials into the environment will have no material effects upon the capitalexpenditures, earnings and competitive position of the company.  

 

Weare subject to certain of the informational requirements of the SecuritiesExchange Act of 1934, as amended, referred to as the Exchange Act.  In accordance with the Exchange Act, we fileannual and quarterly reports and other information with the Securities andExchange Commission, or SEC.  Copies maybe obtained at the prescribed rates from the public reference room maintainedby the SEC at 450 Fifth Street, N.W., Washington, D.C.  20549 and be inspected without charge andcopied at the prescribed rates at the SEC’s regional office at NorthwesternAtrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois60661.  The public may also obtaininformation on the operation of the public reference room by calling the SEC at1-800-SEC-0330.  An electronic versionof our filings may be viewed at the SEC’s website: www.sec.gov.  Additionally, each of these sites alsoprovide access to any other report or other information we file with the SEC

 

**ITEM 2.     PROPERTIES**

 

NevadaSecurity Bank operates from two locations, the principal location being 9990Double R Boulevard, Reno, Nevada, 89521 where the administrative functions andregular branch activities of the bank occur.

 

NevadaSecurity Bank leases the first floor space of this free-standing facility underan agreement dated October 2, 2001, which notes the use of approximately9,300 square feet for a ten-year term beginning at the issuance of acertificate of occupancy.  NevadaSecurity Bank took possession on December 6, 2002 and may extend the leasefor four, five-year periods if not in default under the terms of the agreementat each renewal period.  The leasepayment under this agreement is approximately $9,600 per month with annualescalations for each of the first four years; beginning in year five there is afixed annual escalation of 2.5%.

 

NevadaSecurity Bank’s Incline Village branch office operates in approximately 4,200square feet in an office at the northeast end of the Raley’s Shopping Centerlocated at 910 Tahoe Boulevard, Incline Village, Nevada, 89451.  Nevada Security Bank took possession onMarch 6, 2003 under a five-year lease dated February 26, 2001 thatcontains two renewal periods of five years each if the bank is not in defaultunder the terms of the lease at each renewal period.  The lease payment under this agreement is approximately $6,600per month with annual consumer price index (CPI) adjustments.

 

Inaddition, Nevada Security Bank recently opened a loan production office inRancho Cordova, California, to facilitate the growth of SBA loans serving theneeds of the northern California and northern Nevada markets.  This facility operates in approximately 900square feet in Suite 212 within a two-story office building located at 2893Sunrise Boulevard, Rancho Cordova, California 95742.  Nevada Security Bank took possession on March 15, 2003 undera thirteen-month lease dated February 28, 2003 which contains one renewalperiod of one year if the bank is not in default under the terms of the agreementat the renewal period.  The leasepayment under this agreement is approximately $1,100 per month.  The Bank currently is operating in thisfacility on a month-to-month rental basis.

 

Theapproved but unopened Robb and Mae Ann branch office in Northwest Reno willopen in the third quarter of 2004 and be a free standing building in theMcQueen’s Crossings shopping center development currently underconstruction.  Nevada Security Bank willoccupy this facility under a lease agreement dated October 7, 2003 withpremises of approximately 3,000 square feet within a land area of about 46,000square

 

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feet.  The location will consist of a building,three drive-up lanes, one of which will house an ATM, and one bypass lane.  The term of the lease is twenty years,commencing not later than 270 days after the delivery of the pad to NevadaSecurity Bank, with two ten year extensions available if the tenant is not indefault under the terms of the lease. The lease payment under this agreement is approximately $11,250 permonth for the first five years, with escalations thereafter.

 

NevadaSecurity Bank’s total occupancy expense for the years ended December 31,2003 and 2002, was approximately $896,000 and $564,000 respectively.  Management believes that its existingfacilities are adequate for its present purposes and anticipated growth in theforeseeable future, although limited branch expansion is planned.

 

**ITEM 3.    LEGAL PROCEEDINGS**

 

Inthe normal course of business, the Company is involved in various legalproceedings.  In the opinion ofmanagement, any liability resulting from such proceedings would not have amaterial adverse effect on the Company’s financial condition or results ofoperation. As of the date of this report, there are no legal proceedingsagainst the Company of which management is aware.

 

**ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Nomatters were submitted to a vote of the security holders during the fourthquarter of the period covered by this report.

 

**PART II**

 

**ITEM 5****.     MARKET FOR COMMON EQUITY, RELATEDSHAREHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES**

 

**(a)  Market Information**

 

TheCompany’s Common Stock was listed on the Nasdaq SmallCap Market onMarch 23, 2004.  Prior to that,Nevada Security Bank’s Common Stock was listed on the Over-The-Counter BulletinBoard (OTCBB).  Our Common Stock tradeson the Nasdaq Stock Market® under the symbol TBHS and the CUSIP number of suchcommon stock is 88331E104.  AtDecember 31, 2003 we were not aware of any trading in the Common Stock ofthe Company, and there appeared to be no active trading market.  

 

Managementis aware of the following securities dealers who make a market in the Company’sstock:  D.A. Davidson & Co., TwoCenterpointe Dr., Suite 400, Lake Oswego, OR 97035, 800-249-2610; Howe Barnes Investments Inc., 135 South LaSalleStreet, Chicago, IL  60603, 312-655-3000;and Mitchell Securities Corporation of Oregon, 121 S.W. Morrison St., Suite1060, Portland, OR  97204, 800-224-2226(the “Securities Dealers”).

 

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OurSB-2/A registration statement (file #333-105445) filed with the Securities andExchange Commission was declared effective on February 13, 2004.  The offering under the prospectus was for1,350,000 shares of common stock of The Bank Holdings with one warrant forevery five (5) shares of common stock purchased at an offering price of $11.00per share.  Davidson agreed to serve asunderwriter, on a firm commitment basis, for up to all 1,350,000 shares andrelated warrants offered by the prospectus. The Bank Holdings undertook to sell 850,000 shares directly toinvestors, and Davidson undertook to sell 500,000 shares.  There was no minimum share purchaserequired.  The underwriters purchasedshares at the price of $10.23 per share, reflecting an underwriting discount of7%.  The secondary offering was closedon March 22, 2004. 

 

Thesubscription applications received by The Bank Holdings approximated 2.9million shares, of which 850,000 shares were approved for sale.  The total number of shares underwritten byD.A. Davidson was 702,500 including 202,500 which resulted from theunderwriter’s exercise of the over allotment option.  The cost of such offering as reported in the offering circularForm SB-2 was approximately $1.0 million. As a result, the net proceeds to the Company was approximately $16million.

 

Approximately$4 million raised from the sale will be used to repay debt assumed, approximately$7,000,000 will be used to support further operations of Nevada Security Bank,and approximately $5,000,000 will be used for other business purposes asdescribed in the offering.  

 

TheCompany has not made any repurchases of its stock during the fourth quarters ofthe period covered by this report.

 

Asof December 31, 2003 the following unsecured borrowings of The BankHoldings were outstanding and exempted pursuant to Regulation D,Section 4(6):

 
| **DATE**  |   | **LENDER**                               |   | **AMOUNT** |       | **CLASS** |                 | **PRICE** |   |
|-----------|--------|------------------------------------------|--------|------------|------------|-----------|----------------------|-----------|--------|
| 27-Jun-03 |   | Ed  Allison Inc.                         |   | $          | 17,857.14  |      | Accredited  Investor |      | 100    | % |
| 27-Jun-03 |   | Mr.  Robert Barone                       |   | $          | 17,857.14  |      | Accredited  Investor |      | 100    | % |
| 27-Jun-03 |   | Mr.  Jan Clark                           |   | $          | 17,857.14  |      | Accredited  Investor |      | 100    | % |
| 27-Jun-03 |   | Mr.  Leonard Detrick                     |   | $          | 17,857.14  |      | Accredited  Investor |      | 100    | % |
| 27-Jun-03 |   | D.A.  Funk, Ttee, Funk Family Trust |   | $          | 17,857.16  |      | Accredited  Investor |      | 100    | % |
| 27-Jun-03 |   | Mr.  Hal G. Giomi                        |   | $          | 17,857.14  |      | Accredited  Investor |      | 100    | % |
| 27-Jun-03 |   | Mr.  Jesse Haw                           |   | $          | 17,857.14  |      | Accredited  Investor |      | 100    | % |
| 11-Sep-03 |   | Mr.  Jan Clark                           |   | $          | 500,000.00 |      | Accredited  Investor |      | 100    | % |
| 18-Sep-03 |   | Mr.  Jesse Haw                           |   | $          | 500,000.00 |      | Accredited  Investor |      | 100    | % |
| 22-Sep-03 |   | The  Chipman First Family Ltd. Prtrship  |   | $          | 500,000.00 |      | Accredited  Investor |      | 100    | % |
| 5-Nov-03  |   | Mr.  Jesse Haw                           |   | $          | 500,000.00 |      | Accredited  Investor |      | 100    | % |
| 18-Dec-03 |   | Mrs.  Julia P. Clark                     |   | $          | 500,000.00 |      | Accredited  Investor |      | 100    | % |
| 19-Dec-03 |   | Barone  Liquidity Investments            |   | $          | 500,000.00 |      | Accredited  Investor |      | 100    | % |

 

**(b)  Holders**

 

OnMarch 1, 2004 there were approximately 400 shareholders of record of theCompany’s Common Stock.

 

**(c)  Dividends**

 

Asa bank holding company which currently has no significant assets other than our100% ownership of Nevada Security Bank, our ability to pay cash dividendsdepends upon the dividends we receive from Nevada Security Bank.  The dividend practice of Nevada SecurityBank, like our dividend practice, will depend upon its earnings, financialcondition and other relevant factors, including applicable regulatory orders andrestrictions with respect to dividends. 

 

NevadaSecurity Bank’s ability to pay cash dividends to us is also subject to certainlegal limitations.  Under Nevada law, abank cannot declare a dividend or make a distribution of its net profits until(a) the bank’s surplus fund equals its initial stockholders’ equity (excludingthe amount of the initial surplus fund) and (b) ten percent of the previousyear’s net profits have been carried to the surplus fund.  Additionally, no distribution may be made ifit would result in the bank’s stockholders’ equity (including the reserve forloan losses) being less than 6% of the bank’s average total daily depositliabilities for the preceding 60 days or if it would reduce the stockholders’equity below the initial stockholders’ equity or below minimum applicableregulatory capital requirements under federal law.  Also, under Nevada law applicable to the Nevada Security Bank,and to Nevada corporations generally, no distribution may be made if, aftergiving effect to it,

 

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thecorporation would be unable to pay its debts as they become due in the usualcourse of business or the sum of the corporation’s assets would be less thanthe sum of its liabilities plus the amount (if any) that would be needed tosatisfy the rights of holders of any preferred stock of the corporation,assuming the corporation were to be dissolved at the time of the distribution.

 

Stockdividends are not subject to the Nevada law restrictions or distributions, asdescribed above, because a corporation’s assets, liabilities and totalstockholders’ equity do not change as a result of the stock dividend.

 

Shareholdersare entitled to receive dividends only when and if declared by our board ofdirectors and we have no intention to pay cash dividends in the foreseeablefuture.  Instead, any earnings which maybe generated will be retained for the purpose of increasing our capital andreserves in order to facilitate growth.

 

Sinceinception, we have paid no cash dividends or stock dividends to ourshareholders.

 

**(d)  Securities Authorized for Issuance Under Equity CompensationPlans**

 

Thefollowing table provides information as of December 31, 2003, with respectto options outstanding and available under our Stock Option Plan, which is ouronly equity compensation plan other than an employee benefit plan meeting thequalification requirements of Section 401(a) of the Internal Revenue Code:

 

Equity Compensation Plan Information

 
| **Plan  Category**                                          |   | **Number of Securities to be  issued upon exercise of  outstanding options,  warrants and rights** |   | **Weighted-average exercise  price of outstanding  options, warrants and  rights** |   | **Number of Securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** |   |
|-------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                        |   | **(a)**                                                                                            |   | **(b)**                                                                            |   | **(c)**                                                                                                                                              |   |
| Equity  compensation plans approved by security holders     |   | 227,000                                                                                            |   | $                                                                                  | 10.02  |                                                                                                                                                 | 54,186 |   |
| Equity  compensation plans not approved by security holders |   | —                                                                                             |   | —                                                                             |   | —                                                                                                                                               |   |
|                                                        |   |                                                                                               |   |                                                                               |   |                                                                                                                                                 |   |
| Total                                                       |   | 227,000                                                                                            |   | $                                                                                  | 10.02  |                                                                                                                                                 | 54,186 |   |

 

**ITEM 6****.     MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATION**

 

The“summary selected financial data” that follows is derived from the auditedConsolidated Financial Statements of the Company and from our internalaccounting system.  The selectedfinancial data should be read in conjunction with the audited ConsolidatedFinancial Statements and Notes thereto, and Management’s Discussion andAnalysis of Financial Condition and Results of Operations in Item 6 below.  Statistical information that follows isgenerally based on average daily amounts.

 

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**Summary Selected Consolidated Financial Data**

 
|                                  |   | **Year Ended  December 31,**                  |    |
|---------------------------------------|--------|----------------------------------------------------|---------|
|                                  |   | **2003**                                           |    | **2002** |   | **2001 (4)  (4a)** |   |
|                                  |   | **(Dollars  in thousands, except per share data)** |    |
| **Condensed Income Statement**        |   |                                               |    |   |   |   |   |
| Interest income                       |   | $                                                  | 5,250   |   | $ | 1,948 |   | $ | 218 |   |
| Interest expense                      |   | $                                                  | 1,893   |   | $ | 759 |   | $ | 4 |   |
| Net interest income                   |   | $                                                  | 3,357   |   | $ | 1,189 |   | $ | 214 |   |
| Provision for loan losses             |   | $                                                  | 602     |   | $ | 220 |   | $ | — |   |
| Non - interest income                 |   | $                                                  | 893     |   | $ | 77 |   | $ | — |   |
| Non - interest expenses               |   | $                                                  | 4,213   |   | $ | 2,811 |   | $ | 782 |   |
| Provision for income taxes (1)        |   | $                                                  | —  |   | $ | — |   | $ | — |   |
| Net (loss)                            |   | $                                                  | (565    | ) | $ | (1,765 | ) | $ | (568 | ) |
|                                  |   |                                               |    |   |   |   |   |
| **Period End Data**                   |   |                                               |    |   |   |   |   |
| Assets                                |   | $                                                  | 166,149 |   | $ | 79,676 |   | $ | 14,344 |   |
| Loans, gross                          |   | $                                                  | 82,671  |   | $ | 25,005 |   | $ | — |   |
| Securities                            |   | $                                                  | 74,763  |   | $ | 47,992 |   | $ | — |   |
| Deposits                              |   | $                                                  | 148,747 |   | $ | 67,270 |   | $ | 757 |   |
| Other borrowed funds                  |   | $                                                  | 6,125   |   | $ | 15 |   | $ | — |   |
| Shareholders’ equity             |   | $                                                  | 10,853  |   | $ | 11,995 |   | $ | 13,443 |   |
| Nonperforming assets (3)              |   | $                                                  | —  |   | $ | — |   | $ | — |   |
|                                  |   |                                               |    |   |   |   |   |
| **Average Balance  Sheet**            |   |                                               |    |   |   |   |   |
| Assets                                |   | $                                                  | 121,017 |   | $ | 46,903 |   | n/a |   |
| Loans, gross                          |   | $                                                  | 50,214  |   | $ | 8,318 |   | n/a |   |
| Deposits                              |   | $                                                  | 108,163 |   | $ | 34,209 |   | n/a |   |
| Shareholders’ equity             |   | $                                                  | 11,188  |   | $ | 12,573 |   | n/a |   |
|                                  |   |                                               |    |   |   |   |   |
| **Asset Quality**                     |   |                                               |    |   |   |   |   |
| Non-performing assets (5)             |   | $                                                  | —  |   | $ | — |   | n/a |   |
| Allowance for loan losses             |   | $                                                  | 822     |   | $ | 220 |   | n/a |   |
| Net Charge-offs                       |   | $                                                  | —  |   | $ | — |   | n/a |   |
| Non-performing assets to total assets |   | $                                                  | —  |   | $ | — |   | n/a |   |
| Allowance for loan losses to loans    |   | 0.99                                               | %       | 0.88 | % | n/a |   |
| Net Charge-offs to average loans      |   | $                                                  | —  |   | $ | — |   | n/a |   |
|                                  |   |                                               |    |   |   |   |   |
| **Per Common Share**                  |   |                                               |    |   |   |   |   |
| Basic loss per share                  |   | $                                                  | (0.40   | ) | $ | (1.26 | ) | $ | (0.40 | ) |
| Diluted loss per share                |   | $                                                  | (0.40   | ) | $ | (1.26 | ) | $ | (0.40 | ) |
| Book value per share at year end      |   | $                                                  | 7.72    |   | $ | 8.53 |   | $ | 9.56 |   |
| Period end common shares outstanding  |   | 1,405,930                                          |    | 1,405,930 |   | 1,405,830 |   |
| Weighted average shares outstanding   |   | 1,405,930                                          |    | 1,405,838 |   | 1,405,830 |   |
|                                  |   |                                               |    |   |   |   |   |
| **Financial Ratios**                  |   |                                               |    |   |   |   |   |
| Return on average assets              |   | (-0.47                                             | %)      | (-3.76 | %) | n/a |   |
| Return on average equity              |   | (-5.05                                             | %)      | (-14.04 | %) | n/a |   |
| Net interest margin (2)               |   | 2.91                                               | %       | 2.65 | % | n/a |   |
| Tier 1 leverage capital ratio         |   | 7.06                                               | %       | 15.17 | % | n/a |   |

 

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(1)                        The Company does not record aprovision for income taxes as a result of net operating losses.

(2)                        Net interest income calculatedon a fully-taxable equivalent basis divided by average interest-earning assets.

(3)                        Nonperforming assets consistsof nonperforming loans, other real estate owned, repossessed assets andinvestment securities placed on non-accrual status.  At the current time the Company does not have any non-performingassets.

(4)                        Nevada Security Bank commencedoperations on December 27, 2001 and as a result of its limited activitiesduring this period, much of the selected financial data information would notbe meaningful, and as such has been noted n/a (not applicable).

(4a)                  Data is for the period fromFebruary 26, 2001 (date of inception) through December 31, 2001.

(5)                        Includes loans 90 days or moredelinquent and still accruing interest, non-accrual loans and other real estateowned.  For all periods presented, thereare none.

 

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**Critical Accounting Policies**

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States.  The financial information contained within these statements is,to a significant extent, based on approximate measures of the financial effectsof transactions and events that have already occurred.  Critical accounting policies are those thatinvolve the most complex and subjective decisions and assessments, and have thegreatest potential impact on the Company’s stated results of operations.  In Management’s opinion, the Company’scritical accounting policies deal with the following area:  The establishment of the Company’s allowancefor loan losses, as explained in detail in the “Provision for Loan Losses” and“Allowance for Loan Losses” sections of this discussion and analysis.  

 

Ourallowance for loan loss methodology incorporates a variety of riskconsiderations, both quantitative and qualitative in establishing an allowancefor loan loss that management believes is appropriate at each reportingdate.  Quantitative factors include ourhistorical loss experience, peer bank loss experience, delinquency andcharge-off trends, collateral values, changes in nonperforming loans, loanconcentrations and other factors. Qualitative factors include the general economic conditions in ourstate, and in particular, the state of certain industries in northern Nevada.Size and complexity of individual credits in relation to loan structure,existing loan policies and pace of portfolio growth are other qualitativefactors that are considered in the methodology.  As we add new products and increase the complexity of our loanportfolio, we shall enhance our methodology accordingly.  Management may report a materially differentamount for the provision for loan losses in the statement of operations tochange the allowance for loan losses if its assessment of the above factorswere different.  This discussion andanalysis should be read in conjunction with our financial statements and theaccompanying notes presented elsewhere herein as well as the portion of this Management’sDiscussion and Analysis section entitled “Provision for Loan Losses” and“Allowance for Loan Losses”. Although management believes the levels of theallowance as of December 31, 2003 and 2002 were adequate to absorbprobable losses inherent in the loan portfolio, a decline in local economicconditions, or other factors, could result in increasing losses that cannot bereasonably predicted at this time.

 

Thisdiscussion presents management’s analysis of the financial condition andresults of operations of The Bank Holdings and Nevada Security Bank for each ofthe periods ended December 31, 2003, 2002 and 2001 and includes thestatistical disclosures required by SEC Guide 3 (“Statistical Disclosure byCompany Holding Companies”).  Thediscussion should be read in conjunction with the financial statements of TheBank Holdings and Nevada Security Bank and the notes related thereto whichappear elsewhere in this document.

 

**Summary of Performance**

 

Aspreviously noted and also as reflected in the Consolidated Statements ofOperations, for the years ended December 31, 2003, 2002, and the periodended December 31, 2001, the Company generated net losses of  approximately $565,000, $1.765 million and$568,000, respectively.

 

TheCompany earns income from two primary sources, net interest income generated bythe successful employment of earning assets less the costs of interest-bearingliabilities, and net non-interest income, which is generated by service chargesand fees charged for services provided, less the operating costs of providingthe full range of banking services to our customers.  Pre-underwriting loan fees and gains on sale of securitiescomprise another area of non-interest income.

 

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**2003 over 2002**

 

Thestrong improvement in results of operations for the year endedDecember 31, 2003 when compared to results of the comparable 2002 period,are primarily due to increases in volumes held of investments, loans, anddeposit portfolios.  Total assetsincreased on average approximately $74 million or 158% when comparing 2003 to2002.

 

TheCompany’s loss from operations was approximately $565,000 for the year endedDecember 31,2003 as compared to a loss of $1.765 million for thecomparable period of 2002.  This was areduction of $1.2 million, or about 68% from the previous period.  The net loss per basic share was $0.40 for2003, as compared to $1.26 for 2002. The Company’s return on average assets (ROAA) was -(.5%) and return onaverage equity (ROAE) was -5.1% in 2003, as compared to -3.8% and -14.0%respectively, for 2003.

 

**2002 over 2001**

 

Thestrong improvement in results of operations for the year endedDecember 31, 2002 when compared to results of the 2001 period areprimarily due to increases in volumes for all asset and liability portfoliosfor the Bank’s first full year of operation. For the period ended December 31, 2001 the Bank was operating foronly four days. As a result, there were substantial changes in assets undermanagement, as well as liabilities assumed, when comparing 2002 to 2001, andassets grew to about $80 million at December 31, 2002 from $14 million atDecember 31, 2001.

 

TheCompany’s loss from operations was approximately $1.765 million for the yearended December 31, 2002 as compared to a loss of $568,000 for the periodending December 31, 2001.

 

**Results of Operations**

**2003 over 2002**

 

TheCompany’s net loss for the year ended December 31, 2003 was $565,000 ascompared to the loss of $1.765 million for the year ended December 31,2002.

 

Theprimary contribution to the Company’s earnings improvement in 2003 whencompared to 2002 was a $2.168 million increase in net interest income.  This was brought about by an averageinvestment level approximately 78% greater than the prior period, coupled withan average loan volume of approximately $50 million, which is five times largerthan the previous reported period.  TheCompany’s net interest margin, increased by 26 basis points to 2.91% from 2.65%for the year ended December 31, 2002. The slight increase in the net interest margin was due more to aredistribution of assets held, rather than any marked increase in interestearned on investment or loan portfolio assets. There was a substantial change in the Company’s provisions for loanlosses, for the year ended December 31, 2003, when compared to the sameperiod of 2002.  The provision for loanlosses was $602,000 for 2003 and $220,000 for 2002, an increase of 174%.  The provision is determined pursuant to aperiodic comprehensive analysis of the allowance for loan losses, the allowanceis described in more detail in Table 7 herein.

 

Non-interestincome for the year ended December 31, 2003 was $816,000 higher than theyear ended December 31, 2002, primarily due to pre-underwriting feesassociated with SBA loans and gains on sales of investment securities.  The increase in non-interest income was morethan offset, however, by a $1.4 million unfavorable variance in non-interestexpenses.  Personnel cost increased$748,000 or 58.6% as the Company added more experienced management to itsemployee base, and occupancy expense rose by $332,000 or 58.9% as a result ofthe move from temporary quarters to permanent quarters for the Reno branch andadministrative staff when comparing results for the years endedDecember 31, 2003 to 2002.

 

Atthe current time, the Company has a tax loss carry forward on a consolidatedbasis, and no tax accrual or expense has been recorded for any of the periodsreported within the body of this report.

 

25

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TheCompany’s basic and diluted loss per share for the twelve months endedDecember 31, 2003 was $0.40 as compared to a loss of $1.26 per share forthe same period of the prior year.

 

**2002 over 2001**

 

TheCompany’s net loss for the year ended December 31, 2002 was $1.765 millionas compared to the loss of $568,000 for the period ended December 31,2001.

 

Theprimary contribution to the Company’s earnings improvement in 2002 whencompared to the four day period of operations in 2001 was a $975,000 increasein net interest income.  This wasbrought about by growth of the investment and loan portfolios as compared tothe previous reported period.  TheCompany’s net interest margin was 2.65% for the year ended December 31,2002.  The provision for loan losses was$220,000 for 2002 and there was no provision for 2001.  The provision is determined pursuant to aperiodic comprehensive analysis of the allowance for loan losses.

 

Non-interestincome for the year ended December 31, 2002 was $77,000 as compared to alack of non-interest income for the four days of operation during 2001.  The increase in non-interest income was morethan offset, however, by a $2.0 million unfavorable variance in non-interestexpenses.  Personnel cost increased$868,000, or 213% as the Company added more experienced management to itsemployee base, and occupancy expense rose by $362,000 as a result of the moveinto temporary Reno quarters and permanent quarters for the Incline Villageoffice when comparing results for the years ended December 31, 2002 and2001.

 

TheCompany’s basic and diluted loss per share for the twelve months endedDecember 31, 2002 was $1.26 as compared to a loss of $0.40 for the periodended December 31, 2001.

 

**Net Interest Income and NetInterest Margin**

 

TheCompany’s net interest margin depends on the yields, volumes, and mix of itsearning assets components as compared to the rates, volume and mix of variousfunding sources.  The Company’s netinterest margin is its net interest income expressed as a percentage of averageearning assets.  The Two Year AverageBalance Sheet Table (Appendix A Table 1), which immediately follows reflects the Company’s average balance sheetvolumes of assets, liabilities, and stockholders equity; the amount ofassociated interest income or interest expense; net interest income; theaverage rate or yield for each category of interest earning asset or interestbearing liability; and the net interest margin for the periods noted.

 

**2003 Over 2002**

 

Netinterest income before the provision for loan losses for the year endedDecember 31, 2003 was $3.4 million, as compared to $1.2 million for thesame period of 2002.  This represents anincrease of about $2.2 million, or about 182%. As previously noted, net interest income is the difference between theinterest income and fees earned on loans and investments, and the interestexpense paid on deposits and other borrowings. The amount by which interest income exceeds interest expense depends ontwo factors: the volume and mix of earning assets as compared to that ofinterest bearing deposits and borrowings, and the interest rates earned versusthe interest rates paid on each of the balance sheet portfolios.  The Company’s net interest margin is the netinterest income expressed as a percentage of earning assets.  The margin for 2003 and  2002 is reflected in the Distribution, Rateand Yield Analysis of Net Income tables and reflect the changes in the ratesearned and rates paid on loans, investments, deposits, and borrowed funds heldby the Company during the periods under review.

 

26

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TheCompany’s net interest margin has been impacted by three over-ridingconditions.  The first is the pervasivelow interest rate environment of the last few years brought about by theactions of the Federal Open Market Committee, the second has been the poorgeneral economic conditions of the local and regional markets, and the third isthe extremely competitive loan pricing of the major banks in the Company’smarket.

 

Forthese reasons, management opened a loan production office in Rancho Cordova,California in April 2003 to generate additional loan volume, with thepotential for loan sales income from government guaranteed loan programs.  Although management is optimistic that theCompany’s net interest margin will be improved with additional loan volumes,there is no absolute assurance that fluctuations in market interest rates or othersupply and demand issues will not have a deleterious effect on the Company’snet interest margin and/or net interest income.

 

TheCompany’s 3.09% earnings rate on its investment portfolio for the year endedDecember 31, 2003 was unfavorably impacted by the low interest rateenvironment, heavy refinancing in its mortgage backed portfolio, and the lowrate on liquid overnight funds sold on a daily basis.  When compared to the 3.68% rate earned during the year endedDecember 31, 2002, one can see an almost 20% reduction in earnings in theinvestment portfolio, in the year ended December 31, 2003 from the yearended December 31, 2002.

 

TheCompany’s rates earned on its loan portfolio over the same periods did not fallby the same magnitude.  While the primerate fell twice during the intervening period, the overall earnings rate of6.44% for the year ended December 31, 2003 was not as noticeably reducedfrom the 7.23% rate earned for the year ended December 31, 2002.

 

Asa result of the foregoing, variances, the Company’s gross earnings rate for theyear ended December 31, 2003 was 4.55%, as compared to 4.34% for the sameperiod of 2002.

 

Interestexpense rates for the same periods noted above were favorably impacted by thelower interest rate environment previously noted, however, and the Company’sinterest paid rate on all interest bearing liabilities was 2.01% for the yearended December 31, 2003 as compared to 2.59% for the same period in2002.  The Company’s overall netinterest margin, however, increased to 2.91% for the year endedDecember 31, 2003, as compared to 2.65% for the same period in 2002.

 

Althoughactual earnings rates declined on the Company’s investments and loan portfoliosover the year ended December 31, 2003 when compared to the same period in2002, the decline in rates paid on interest bearing liabilities was moreaccelerated.  As a result, the Company’snet interest margin increased by 26 basis points over the year endedDecember 31, 2003 when compared to the same period of 2002.

 

TheChanges in Net Interest Income Table (see Appendix A Table 2) presentsinformation regarding interest income and interest expense for each majorcategory of interest-earning assets and interest-bearing liabilities.  The table sets forth changes in interest incomeand expense attributable to changes in average balances (volume) or changes inaverage interest rates (rates).  Thecalculation is as follows:  (i) changesin rate (changes in rate multiplied by prior year volume), (ii) change involume (change in volume multiplied by prior year rate) and (iii) changes inboth rate and volume (change in rate multiplied by change in volume).  Changes in interest income and expense thatare not due solely to volume or rate changes are combined with the volume/ratechange category.

 

Ratechanges are shown to have caused a drop of $255,000 in net interest income forthe year ended December 31, 2003 relative to the same period of 2002,which presages the decrease reported for the Company’s net interest margin forthe same period.  While the rates arelower, total interest income on a volume basis was actually enhanced byapproximately $4.6 million over the period due to over-riding positivevariances in both investment and loan portfolio volumes.

 

TheCompany’s net interest margin is also impacted by changes in the mix ofinterest earning assets and interest bearing liabilities, as well as by changesin the relative level of non - earning assets (including cash

 

27

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anddue from banks).  On the asset side ofthe balance sheet, the relative increase in the loan to deposit ratio had apositive impact on the weighted average yield on earning assets.

 

Forthe twelve months ended December 31, 2002 the average yield on theinvestment portfolio was 3.68%, while the average yield on the loan portfoliowas 7.23% for a combined weighted yield of 4.34% on $44.9 million of averageearning assets.

 

Forthe same period, the interest costs on deposit liabilities was 2.58% and 15.79%on interest bearing liabilities, for a combined weighted average cost of 2.59%on $29.3 million total interest bearing liabilities.

 

Asa result, the Bank’s net interest margin was 2.65%, and its interest ratespread was 1.75% for the year ended December 31, 2002.

 

**2002 over 2001**

 

Dueto the fact that the Bank was opened for business on December 27, 2001, nomeaningful analysis can be drawn for this four day period of operation inrelation to the Bank’s first full year of operation for the twelve months endedDecember 31, 2002, when a full range of traditional banking activitieswere undertaken.

 

**Non–Interest Income andNon–Interest Expense**

 

**2003 over 2002**

 

TheCompany’s results reflected a higher level of non-interest income in the yearended December 31, 2003 than that ended December 31, 2002.  See Non-Interest Income and Non-InterestExpense Table (Appendix A Table 3).  Theoverall ratio of non-interest income to average earning assets increased to0.77% from 0.17% for the year ended December 31, 2003 as compared toDecember 31, 2002.

 

Totalnon-interest expenses increased to $4.2 million in the year endedDecember 31, 2003 from $2.8 million in the period ended December 31,2002.  As a percentage of averageearning assets, total overhead expenses were 3.65% and 6.26% for the yearsended December 31, 2003 and 2002, respectively.

 

TheCompany’s overhead efficiency ratio for all the periods under review declineddue to the Company’s substantial growth. The overhead efficiency ratio represents total non-interest expensedivided by the sum of net interest income and total non-interest income.  Neither the provision for loan losses norsecurities gains or losses are factored into the equation. The Company’soverhead efficiency ratio was 112.3% for the twelve months ended December 31,2003 versus 223.6% for the same period of 2002.

 

Includedin the increase in non-interest income are $75,000 in service charges ondeposit accounts for the year ended December 31, 2003 while the amount forthe twelve months ended December 31, 2002 was $24,000.  This increase was based on the moreconsistent collection of monthly service charges and non-sufficient fundscharges paid as well as higher deposit account volumes.  Other service charges, commissions and feesare primarily comprised of wire transfer and loan documentation fees, for allperiods under review.

 

Pre-underwritingfees are a result of agreements with third parties whereby the Company performscertain pre-underwriting activities on SBA loans which are funded by the thirdparty.  These activities are conducted inthe Rancho Cordova, California loan production office.  This office is expected to contributeadditional loan volumes to the Company, and to provide additional sources ofincome based on sales of government guaranteed loans to financialintermediaries.  No absolute assurancecan be given, however, that this will in fact, occur.  Pre-underwriting fees for the periods under review is containedonly within the last two quarters of 2003 and amount to $224,000 since the loanproduction office was not opened until the second quarter of 2003.

 

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Thetotal amount of non-interest income for the year ended December 31, 2003was substantially enhanced by the gain taken on sale of securities which was$497,000 as compared to gains taken during the year ended December 31,2002 of only $9,000.  The securitiessold during 2003 were almost exclusively corporate bonds, and the gains weretaken when spreads had tightened and it appeared the overall bond market wouldbe adversely affected by recent tax initiatives in the Congress.

 

Thelargest increase for any specific category of expenses was in salaries andemployee benefits, which was $748,000 or 58.6% higher in the year endedDecember 31, 2003 than for the same period of 2002.  Personnel costs approximated 48% of totalnon-interest expense and 1.75% of average earning assets during 2003 and 45% oftotal non interest expenses, as well as 2.84% of average earning assets for thesame period in 2002.  This reflects theCompany’s addition of experienced professional staff during late 2002 and 2003as it aligned its staffing levels to business plans requirements for additionalloan production capabilities.

 

Thesecond greatest increase in non-interest expenses is most evident in the occupancycosts for the Company. This was due to two primary factors; 1) the move of theReno branch and administrative offices from two temporary locations to a 9100square foot permanent facility during the fourth quarter of 2002, and 2) theadditional premises, equipment, and data processing costs initiated by suchmove. Total occupancy costs approximated 21% of total non-interest expense and..78% of average earning assets during the year ended December 31, 2003,and 20% of total non-interest expense and 1.26% of average earning assets forthe same period of 2002.

 

Thethird greatest area of non-interest expense increase has been in dataprocessing costs.  Data processingexpenses increased to 4.75% of total non-interest expenses for the year endedDecember 31, 2003 from 3.63% for the same period of 2002.    This amount declined to 0.17% of averageearning assets for the twelve  monthsended December 31, 2003 from 0.23% for the same period in 2002. TheCompany believes that the customer base envisioned in its business plan is moreoriented towards a “high-tech, soft-touch” financial services provider than haspreviously been the case in the northern Nevada market. To this extent, theCompany started its provision of banking services to include check truncation, imagestatements, on-line ATM’s and internet consumer banking, and added commercialaccount internet banking upon its move to permanent facilities. Further, theCompany anticipates that with the recently passed Check 21 law, it will beamong the forefront of image capable financial service providers with a currentproject to install image capture devices in its two current branches by the endof the year.  However, no absoluteassurance can be given that that this will in fact occur.

 

Theso-called “Check 21” bill, passed into law on October 28, 2003 allowsbanks to clear checks electronically without sending the actual cancelledchecks to one another or their customers. Customers or banks would be able to request substitute checks, orreprints that would provide the same information as the original documents,should the original document be required. This electronic clearing is expected to facilitate the interbankexchange of digital images and their use for clearing and settling, therebystreamlining the collection of funds between banks, and eliminating the costlyand time delayed collection of funds through paper check item processing. Thislaw will take effect in October, 2004.

 

Asa result of the Company’s orientation towards being an integrated data provider,telephone and data communication costs have been higher than one mightanticipate from a local community institution. However, with two offices in Nevada and a loan production facility inCalifornia inter-connected to Auburn, California and Charlotte, North Carolinawhich provide on-line capabilities, the Company’s communication costs haveindeed been high. Based on the technology supported focus of the Company,however, it is expected that this is likely to continue.

 

Eachof certain other non-interest expense categories are shown with their relatedpercentage of overall non-interest expense, so that one may view theircontribution to the overall cost structure of the company. Further, theCompany’s efficiency ratio is noted, as was explained above.

 

29

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Managementexpects that non-interest expenses will moderate as a percentage of averageearning assets as the Company continues to grow and management further refinesmost areas of the Company’s cost structure, however, no assurance can be giventhat this, in fact, will occur.

 

**2002 Over 2001**

 

Asnoted previously, total non-interest income for the twelve months endedDecember 31, 2002 was $77,000 or 0.17% of average earning assets, ascompared to the lack of non-interest income during the Bank’s four days ofoperations during the period ended December 31, 2001.

 

Further,the Bank’s non-interest expense of $2.8 million for the year endedDecember 31, 2002 was in comparison to $782,000 of such expense for theperiod ended December 31, 2001. For 2002, this amount represented 6.26% of average earning assets, whilefor the four days of operations during 2001, such analysis is not meaningful.

 

Inaddition, salaries and employee benefits costs comprised the major portion oftotal non-interest expense for both periods under consideration, while totaloccupancy costs were second in order of magnitude for the twelve months endedDecember 31, 2002 when compared to the period ended December 31,2001.  Other comparisons may be drawnfrom the information presented in the Non-Interest Income/Expense Table,however, due to the substantive lack of operating history for 2001, suchcomparisons may be somewhat problematic.

 

**Provision for Loan Losses**

 

Creditrisk is inherent in the business of making loans.  The Company sets aside an allowance for probable loan lossesthrough periodic charges to earnings, which are reflected in the incomestatement as the provision for loan losses. Specifically, the provision for loan losses represents the amountcharged against current period earnings to achieve an allowance for loan lossesthat in management’s judgment is adequate to absorb losses inherent in theBank’s loan portfolio.  See Appendix ATable 6 for information regarding the activity in The Allowance For LoanLosses.  The provision is determinedpursuant to a periodic comprehensive analysis of the allowance for loan losses.

 

**2003 Over 2002 and 2001**

 

Forthe year ended December 31, 2003 the Company’s provision for loan losseswas $602,000, which is $382,000 more than the $220,000 provided for during thetwelve months ended December 31, 2002. The loan loss provision was higher in 2003 concurrent with the largeincrease in outstanding loan balances in 2003. The procedures for monitoring the adequacy of the allowance, anddetailed information on the allowance, are included below in “Allowance forLoan Losses”.

 

Forthe periods under review, December 31, 2003 and December 31, 2002,there were not substantive changes in loan concentrations, loan quality, orloan terms, and as a result the change in the provision for loan losses wasprimarily related to loan portfolio growth. At December 31, 2001 the Bank had no loans outstanding.  See Appendix A Table 4 regarding compositionof loan portfolio and Appendix A Table 5 regarding the contractual maturitiesof the loan portfolio.

 

During2003, we refined and further evaluated certain assumptions and estimationmethods related to each primary loan category which reflects the loan purpose,strength of borrower, collateral (if any), the loan–to-value ratio (asappropriate), and the loan’s repayment terms and method, each of which isdocumented and made a part of our quarterly determination of the adequacy ofthe allowance for loan losses.  To thecurrent date, there have been no reallocations of the allowance for loan lossesamong different parts of the portfolio.

 

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Inaddition, the Bank provides an allowance for undisbursed loan commitments, suchallowance which is reported in other liabilities.  At December 31, 2003, this allowance totaled $75,000 andrepresented 0.09% of total gross loans. At December 31, 2002 this allowance was $62,000 and represented0.24% of total gross loans.

 

**Provision for Income Taxes**

 

TheCompany does not record a provision for income taxes. At December 31, 2003and 2002, respectively, the Company had approximately $2.7 and $2.2 million ofoperating loss carry-forwards for federal income tax purposes which expire in2021.

 

**Financial Condition**

 

The Company is still in its initial growth phase, as is evidenced bythe dramatic increase in total assets to $166 million at December 31, 2003from $80 million at December 31, 2002 or total growth of about $86 millionsince the end of the year 2002.  BetweenDecember 31, 2002 and December 31, 2003, deposits have increased $81million or approximately 121%, investments have increased over $26 million, or56% and gross loans have grown by over $57 million, an increase of approximately230%.  The increase in volumes ofearning assets has kept pace with deposit growth, and the Company’s percentageof earning assets was over 90% for both periods.

 

The Company’s deposit growth has come from three primary sources, twoof which were its branches in Incline Village and Reno, while the third sourcehas been a specialized program of tax free real estate exchange deposits. AtDecember 31, 2003, these deposits totaled approximately $50 million andaccounted for about 34% of the subsidiary bank’s deposits.  With the addition to staff during 2003, amore formal program of cross-selling and specific marketing activities wasimplemented to further enhance deposit and loan growth.

 

**BALANCE SHEET ANALYSIS**

 

**EARNING ASSETS**

 

**Investment Portfolio**

 

SeeAppendix A Table 8 for a detail of securities available for sale and held tomaturity and Appendix A Table 9 for information regarding the contractualmaturities of our debt securities. Actual maturities will differ from contracted scheduled maturitiesbecause borrowers may have the right to call for redemption or prepayobligations with or without call or prepayment penalties.

 

Themajor components of the earning asset base for the Company are its investmentsecurities and loan portfolios. The detailed composition and growthcharacteristics of both of these portfolios are very significant to anyanalysis of the financial condition of the Company. The Company’s investmentsare analyzed in this section, while the loan portfolio is discussed in a latersection of this Form 10-KSB.

 

Pursuantto SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities” on December 31, 1993, the Company has classified itsinvestments into two primary portfolios, those “available-for-sale”, and those“held-to-maturity”.  In addition, whilea “trading portfolio” is allowed by SFAS 115, the Company has no currentinvestments which are so classified.

 

Theinvestment portfolio serves several purposes: 1) it provides liquidity tomitigate uneven cash flows from the loan and deposit activities of customers;2) it provides a source of pledged assets for securing public deposits andborrowed funds; 3) it is a large base of assets, the maturity and interest ratecharacteristics of which can be changed more readily than the loan portfolio tobetter match changes in the deposit base and

 

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otherfunding sources of the Company; 4) it is an alternative interest-earning use offunds when loan demand is light; and 5) it may provide partially tax exemptincome. During the Company’s growth since its inception two years ago, depositacquisition activities have outpaced loan growth.  As a result, the Company’s investment portfolio has been the primaryplacement of interest earning funds over the periods reported.  With additional lending staff in the Reno,Nevada and Rancho Cordova, California markets, it is believed that loan growthwill accelerate, although no absolute assurance can be given that this will, infact, occur.

 

TheCompany’s investment portfolio is primarily composed of six subsets: (1) “FedFunds Sold”, which are temporary overnight sales of excess funds tocorrespondent banks, and are not detailed as an element within the Company’slonger-term investment portfolio; (2) US Treasury and Agency issues forliquidity; (3) state, county and municipal obligations which may providelimited tax free income and pledging potential; (4) mortgage-backed securitiesfor cash flow and enhanced earnings; (5) corporate bonds; and (6) other equityinvestments, some of which are readily marketable and carried in investments,and some of which are not readily marketable and are carried in otherassets.  These include equity in theFederal Home Loan Bank of San Francisco and Pacific Coast Bankers Bancorp, bothof which are currently considered not to have readily determinable marketvalues.  The relative distribution ofthese groups within the overall portfolio has varied over the periods noted,especially as regards the extent of Agency, mortgage-backed and corporateinvestments held.  The equity portfoliois comprised exclusively of ownership in the Federal Home Loan Bank of SanFrancisco and an investment in Pacific Coast Banker’s Bancorp, which is a correspondentbank.

 

Totalinvestment securities were approximately $75 million at December 31, 2003,exclusive of temporary overnight placements of about $2.6 million in Fed Fundssold.  This compares to slightly lessthan $48 million of investment securities and approximately $2 million of FedFunds sold at December 31, 2002. The most noticeable differences in the portfolio was the growth of theAFS portfolio as a portion of the overall portfolio balances atDecember 31, 2003, when compared to December 31, 2002.  In addition there were the additions ofgreater volumes of U.S. government sponsored agency investments, as well asmortgage-backed securities, when December 31, 2003 is compared toDecember 31, 2002.

 

Totalinvestments averaged approximately $65 million for the year endedDecember 31, 2003, a 78% increase from the approximately $37 millionaverage reported at December 31, 2002. The most noticeable difference in the portfolio was the addition of agreater volume of mortgage-backed securities, as compared to Treasury andAgency securities in the previous period. The Company has been modifying its investment management activities toachieve greater earnings on its portfolio than was evident in priorperiods.  The investment portfolio forthe year ended December 31, 2003 comprised 56% of average earning assets,while for the year ended December 31, 2002, the investment portfoliorepresented an even greater 81% of average earning assets.

 

Concentrations of investments or securities held exceeding 10% ofstockholders’ equity are as follows: the current book value of held to maturitypass through securities issued by FNMA and FHLMC at December 31, 2003 was$17.1 million, with a market value of $16.9 million, while at December 31,2002 this amount was $8.5 million with a market value of $8.7 million. For thedate of December 31, 2003 the amount of mortgage backed pass throughsecurities guaranteed by GNMA  was $3.1million with a market value of $3.2 million, while at December 31, 2002this was $2.3 million with a market value of $2.4 million. Other held tomaturity mortgage backed CMO’s issued or guaranteed by FNMA, FHLMC o GNMA atDecember 31, 2002 were $6.5 million with a market value of $6.4 million,while at December 31, 2002 this amount was or $7.9 million with a marketvalue of $7.8 million.

 

**Loan Portfolio**

 

Acomparative schedule of the distribution of the Company’s loans atDecember 31, 2003 and 2002 is presented in Appendix A Table 4 Compositionof The Loan Portfolio.  The amountsshown in the table are before deferred or unamortized loan origination,extension, or commitment fees and origination costs for loans in thatcategory.  Further, the figures notedfor each category are presented as percentages, for ease of reviewer analysis.  There were no loans outstanding as ofDecember 31, 2001.

 

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Gross loans have increased by about $58 million, or over 230% to almost$83 million during the twelve months ended December 31, 2003.  As one can see in Appendix A Table 4, themost significant volume change between December 31, 2003 andDecember 31, 2002 has been the increase of the Company’s real estatesecured loan portfolio.  This volumeincreased by about $31 million, and comprised about 54% of all loan growthduring the twelve months ended December 31, 2003.  Substantial other growth has taken place inthe volume of SBA and USDA loans held in the Bank’s portfolio.  This amount includes approximately $11million purchased in the secondary market from brokerage firms with the purposeof enhancing loan volumes, increasing overall portfolio yields, and changingthe asset/liability profile of the Company. Other than this growth in the government guaranteed loan portfolio, thegrowth that has occurred has been accomplished primarily in the increased activitylevels of the Company’s Reno office. Generally speaking, all changes have beensubstantial in the Company’s loans held in the categories noted, over theperiods under review.

 

At December 31, 2003, our average interest earning asset base ispredominately comprised of investments, as loans have not yet reached thepercentage of average assets reported by our peers.  While it is anticipated that loan volumes will increase as apercentage of average earning assets as we grow, there can be no absolute assurancethat this will, in fact, occur.  Shouldthe volume of loans change dramatically, a change in the relative mix of loancategories is also likely to occur.

 

**Loan Maturities**

 

AppendixA Table 5 Scheduled Contractual Maturities of the Loan Portfolio presents thematurity distribution for each major category of our loan portfolio and thesensitivity of such loans to changes in interest rates at December 31,2003 and 2002.

 

**Off – Balance Sheet Arrangements**

 

Inthe usual course of business, the Company makes commitments to extend credit aslong as there are no violations of any conditions established in theoutstanding contractual arrangement. Commitments to extend credit were $27.9 million at December 31,2003 as compared to $14.5 million at December 31, 2002.  These commitments represented about 34% and58% of outstanding gross loans at each of the periods noted, respectively.  The Company’s stand-by letters of credittotaled $197,000 at December 31, 2003 and there were none outstanding atDecember 31, 2002.   This totalrepresented an insignificant portion of total commitments outstanding atDecember 31, 2003.

 

Theeffect on the Company’s revenues, expenses, cash flows and liquidity from theunused portion of the commitments to provide credit cannot be reasonablypredicted because there is no guarantee that the lines of credit will ever beused. For more information regarding the Company’s off-balance sheetarrangements, please refer to Note 9 to the financial statements.

 

**Non–Performing Assets**

 

Wemanage asset quality and control credit risk through the application ofpolicies, practices and procedures designed to promote sound underwriting andloan monitoring, and the diversification of the loan portfolio.  The loan administration function is chargedwith monitoring asset quality and establishing credit policies, practices andprocedures which are consistently enforced. At all periods under review, we had no non-performing assets.

 

Theevaluation of these factors, as in other of our risk areas, is performed byindependent third party review firms that employ credit professionals todetermine our adherence to previously established internal guidelines.  These evaluations include many factors, suchas loan growth, changes in the composition of the loan portfolio,delinquencies, general economic conditions that could impact the value ofcollateral, management’s general assessment of loan portfolio quality, andother trends and conditions.  Further,such

 

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independentexternal reviews include evaluating the financial strength of the borrowers,the value of applicable collateral, any prior loan loss experiences, the growthin the loan portfolio, and other conditions. During the twelve months ended December 31, 2003, two suchevaluations were conducted, as was an evaluation of the adequacy of our loanloss allowance.  In addition, bankregulatory authorities, as part of their periodic examinations of the Bank,review loan quality and the adequacy of the allowance for loan losses.

 

Non-performingassets are comprised of the following: Loans for which the Company is no longer accruing interest; loans 90days or more past due and still accruing interest (although loans are generallyplaced on non-accrual when they become 90 days past due); loans restructuredwhere the terms of repayment have been renegotiated resulting in a deferral ofinterest or principal; and other real estate owned (“OREO”).  Management’s classification of a loan asnon-accrual or restructured is an indication that there is reasonable doubt asto the Company’s ability to collect principal or interest on the loan.  At that point, the Company stops accruingincome from the interest on the loan, reverses any uncollected interest thathad been accrued but unpaid, and recognizes interest income only as cashinterest payments are received and as long as the collection of all outstandingprincipal is not in doubt.  These loansmay or may not be collateralized, but in all cases collection efforts arecontinuously pursued.  At all periodsunder review, the Company had no non-performing assets.

 

**Allowance for Loan Losses**

 

Theallowance for loan losses (ALL) is established through a provision for loanlosses based on management’s evaluation of known and inherent risks in theCompany’s loan portfolio.  The allowanceis increased by provisions charged against current earnings, and reduced by netcharge-offs.  Specifically identifiableand quantifiable losses are immediately charged off against the allowance;recoveries are generally recorded only when cash payments are receivedsubsequent to the charge off.

 

Weemploy a systematic methodology for determining the allowance for loan lossesthat includes a monthly review process and quarterly adjustment of the allowance.  Our process includes a periodic review ofindividual loans that have been specifically identified as problem loans orhave characteristics that could lead to impairment, as well as detailed reviewof other loans (either individually or in pools).  While this methodology utilizes historical and other objectiveinformation, the establishment of the allowance for loan losses and theclassification of loans is also to some extent, based on management’s judgmentand experience.

 

Peerdata for institutions reported in the Uniform Bank Performance Report for theState of Nevada reflects an allowance for loan losses of 1.26% of total loansat June 30, 2003.  This compares tothe National Peer Group #9 (all insured commercial banks having assets between$100-$300 million with two or less banking offices, and located in ametropolitan area) ratio of 1.22% as of the same date.  For the National Peer Group, loan losseswere reported at .11% of average total oustandings, on an annualized basis,while for the state, it was reported at .15%.

 

Ourmethodology incorporates a variety of risk considerations, both quantitativeand qualitative, in establishing an allowance for loan losses that managementbelieves is appropriate at each reporting date.  Quantitative factors include national peer and state peerhistorical loss experience, our historical loss experience, delinquency andcharge-off trends, collateral values, changes in non-performing loans, andother factors.

 

Qualitativefactors include the general economic environment in our markets and, keyindustries in the Northern Nevada markets. The way a particular loan might be structured, the extent and nature ofwaivers of existing loan policies, the results of bank regulatory examination,model imprecision, and the rate of portfolio growth are additional qualitativefactors that are considered.  To datethe Company has experienced no loan losses.

 

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AppendixA Table 6 summarizes the activity in the allowance for loan losses for theperiods indicated.

 

AppendixA Table 7 provides information regarding the allocation of the Allowance forLoan Losses.

 

Managementbelieves that the ALL at December 31, 2003 is sufficient to absorb lossesinherent in the loan portfolio.  This amountis based on the best available information and does involve uncertainty andmatters of judgment.  Accordingly, theadequacy of the loan loss reserve cannot be determined with precision and couldbe susceptible to significant change in future periods.  In addition, however, we carry an allowancefor undisbursed loan commitments which is reported as an “otherliability.”  At December 31, 2003and 2002, such allowance totaled $75,000 and $62,000, respectively, andrepresented 0.27% and 0.43% of loan commitments outstanding, respectively, and0.09% and 0.25% of total gross loans, respectively.

 

**Non-Earning Assets**

 

Non-earningassets are those assets that by their characteristics do not generate interestincome for the Company.  Generallyspeaking, a financial institution would prefer to minimize such assets, whichare primarily composed of cash and due from balances, fixed assets and “other”assets.  At December 31, 2003 andDecember 31, 2002 such assets totaled about $7 million and $5 millionrespectively.  As of December 31,2003 and December 31, 2002, such assets represented approximately 4% and6% of total assets, respectively.

 

**Cash and Due From Banks**

 

Cashon hand and balances due from correspondent banks represent the major portionof the Company’s non-earning assets. At  December 31, 2003 cashand due from banks comprised about 2% of total assets and about 50% of totalnon-earning assets, as compared to about 3% and 42%, respectively, of totalassets and non-earning assets at December 31, 2002.

 

**Premises and Equipment**

 

Fixedassets represent the second greatest volume of non-earning assets, andcomprised about 31% of such total at December 31, 2003 as compared to 43%at December 31, 2002.

 

Thenet book value of the Company’s premises and equipment decreased by $100,000,or 5%, in 2003, even after the purchase of approximately $248,000 in equipmentduring the year.  This was more thanoffset by increased depreciation charges, however.   The Company’s net premises and equipment were 1.2% of totalassets at December 31, 2003, and 2.7% of total assets at the end of 2002.

 

Premisesand equipment are stated at cost less accumulated depreciation andamortization.  Depreciation is chargedto income over the estimated useful lives of the assets and leasehold improvementsare amortized over the terms of the related lease, or the estimated usefullives of the improvements, whichever is shorter.  Depreciation and amortization was $353,000 for the year endedDecember 31, 2003 as compared to $189,000 during 2002.  Appendix A Table 10 Premises and Equipmentreflects the balances by major category of fixed assets:

 

**Other Assets**

 

Otherassets are primarily composed of accrued interest receivable on investments andloans, certain prepaid accounts, and items in process of review anddetermination as to their ultimate disposition.  These amounts were $1.3 million and $713,000 as ofDecember 31, 2003 and 2002, respectively. Of the total “other assets”, accrued interest receivable represented 82%and 86% at December 31, 2003 and 2002, respectively.

 

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**Deposits**

 

Animportant balance sheet component impacting the Company’s net interest marginis the composition and cost of the Company’s deposit base.  Net interest margin is improved to theextent that growth in deposits can be focused in the less volatile and somewhatmore traditional core deposits, which are non-interest bearing demand, NOWaccounts, savings accounts, money market deposit accounts (MMDA’s) and timedeposits under $100,000.

 

Thecompany’s growth of deposit accounts in the demand, NOW, and Certificate areashas been patterned along traditional means of acquisition:  new customers coming into a branch facility;returning customers well known to staff or management bringing theirrelationships over to the new bank, or as the result of calls made by staff,officers, or directors on certain prospective or potential customers.  Further, it is the Company’s goal to haveestablished both deposit and loan relationships with all of the Company’scustomers.

 

Inaddition to these sources, however, the Company has a deposit acquisitionofficer assigned to real estate related companies, who is responsible fordeveloping growth in this deposit class. As a result of such activities, the Company has generated $50 million ofMMDA deposits related to that source of endeavor at December 31, 2003,which represented about 34% of total deposit accounts.  At December 31, 2002 this type of MMDAdeposit approximated $15 million and represented 22% of deposit accounts.

 

Asillustrated in the Average Balances Sheet (Appendix A Table 1), the averagerate paid on interest bearing deposits decreased moderately to 1.98% during theyear ended December 31, 2003 from 2.58% for the year ended December 31,2002.  Average interest bearing depositvolumes increased by about $64 million, or approximately 217% for the yearended December 31, 2003 over the year ended December 31, 2002.

 

Aspreviously noted, the primary difference between deposit volumes at December 31,2003, when compared to December 31, 2002, is the growth of money marketaccounts.  This change was due topromotional rates and terms within money market advertisements during the year,in local retail markets.  Thissubstantial growth in “core deposits” may modify the Company’s interest raterisk, and its deposit cash flows.

 

Potentially, the most volatile deposits in a financial institution arethe large certificates of deposits, those generally over $100,000.  Because these deposits, when considered withother customer specific deposits, may exceed the maximum amount of FDICinsurance for an account, depositors may select shorter maturities to offsetperceived risk elements associated with deposits over $100,000.  The Company may find such certificates to bemore volatile than those generated within its branches from traditionalsources; however, as branches generate additional deposit growth, this effectshould be somewhat mitigated.  Refer toAppendix A Table 11, Maturity Schedule of Time Certificates of Deposit formore information.

 

**Non – Interest Bearing Liabilities**

 

Non-interestbearing deposit liabilities are an integral part of a financial institution’sfunds portfolio.  These consumer andbusiness checking accounts provide a relatively stable source of investablefunds which are considered among a financial institution’s core deposits.  Non-interest bearing demand deposits wereabout 15.6% and 15.4%, respectively of total deposits at December 31, 2003and 2002 and averaged about 14% of total average deposits for each of thetwelve months ended December 31, 2003 and 2002.

 

Othernon-interest bearing liabilities are primarily comprised of interest payable,and other expenses accrued but unpaid, and certain clearing amounts.  Accrued interest payable increased duringthe twelve months ended December 31, 2003 due to higher depositvolumes.  Generally speaking, thebalance of “other liabilities” represents a small percentage of overallliabilities and is not material to the discussion of funding sources.

 

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**Other Borrowings**

 

Wemay occasionally use Fed funds purchased and short-term Federal Home Loan Bank(FHLB) borrowings to support liquidity needs created by seasonal deposit flows,to temporarily satisfy funding needs from increased loan demand, and for othershort-term purposes.  Uncommitted linesare available from several correspondent banks, however, the borrowing line atFHLB is dependent on the level of pledged collateral.  There was a total of $15 million available from this source atDecember 31, 2003 and $6 million at December 31, 2002.

 

Wehave lines of credit available to us under various agreements with the FederalHome Loan Bank of San Francisco, Pacific Coast Banker’s Bank, and ZionsNational Bank.  As of December 31,2003 $3 million had been drawn from the FHLB. At December 31, 2002, no funds had been drawn from these sources.  Other borrowed funds as of December 31,2003 includes $3.125 million in unsecured notes payable to relatedparties.  These notes were issued by theCompany and $2.750 million of the funds were contributed to Nevada SecurityBank to support its growth.  Of thetotal notes drawn, $3 million have a floating rate with a floor of 6.25% andare due April 30, 2004, while $125,000 are drawn with a floating rate witha floor of 6.5% and are due June 30, 2005.

 

Sincegrowth in core deposits may be at intervals different from loan demand, we mayfollow a pattern of funding irregular growth in assets with overnight borrowings,which are then replaced with core deposits. This temporary funding source is likely to be utilized for generallyshort–term periods, although no assurance can absolutely be given that thiswill, in fact, occur.  Refer to AppendixA Table 12, Other Borrowed Funds, which notes the extent of utilization of thefunding source over represented periods.

 

**Capital Resources**

 

AtDecember 31, 2003, the Company had total shareholders’ equity of $10.9million, comprised of $14 million in common stock, $3 million in accumulateddeficit, and $261,000 in accumulated other comprehensive loss.  Total shareholders’ equity at the end of2002 was $12 million.  The Company’swholly owned subsidiary, Nevada Security Bank, is required by the FDIC tomaintain an 8% capital ratio during its first three years of operation.  Due to the Bank’s substantial growth, theCompany has been required to contribute additional capital to the Bank toassure that the mandated ratio is not breached.

 

Dueto the Company’s short history and the lack of operating earnings, it has notbeen able to borrow from institutional sources to alleviate the pressure on theBank’s capital ratio.  As a result, theCompany borrowed $3.125 million from related parties at terms and conditionsthe same as those proposed for companies with a longer history and consistentearnings.  Such borrowings have providedthe source of $2.750 million in additional capital at the subsidiary level,which alleviates current pressure on the Bank’s capital ratio.  The decrease in shareholders’ equity fromDecember 31, 2002 to December 31, 2003 was due primarily to operatinglosses but also includes a reduction in the value of available for salesecurities held in the Company’s portfolio.

 

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and theBank.  Management reviews these capitalmeasurements on a quarterly basis and takes appropriate action to ensure thatthey are within established internal and external guidelines.  The Company’s current capital positionexceeds minimum thresholds established by industry regulators.  Based on current regulatory definitions, theBank is well capitalized, which is the highest rating of the categories definedunder Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991.

 

TheFederal Deposit Insurance Corporation (FDIC) has promulgated risk-based capitalguidelines for all state non-member banks such as the Bank.  These guidelines establish a risk-adjustedratio relating capital to different categories of assets and off balance sheetexposures.  There are two categories ofcapital under the guidelines, Tier 1 Capital includes common stockholders’equity and qualifying minority interests in

 

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consolidatedsubsidiaries, less goodwill and certain other deductions, notably theunrealized net gains or losses (after tax adjustments) on available for saleinvestment securities carried at fair market value.  Tier 2 Capital includes preferred stock, certain types of debtequity, and the allowance for loan losses, subject to certain limitations.

 

AppendixA Table 13 sets forth the Company’s and the Bank’s regulatory capital ratios asof the dates indicated.

 

TheBank Holdings conducted an offering for 1,350,000 shares of Common Stock and270,000 Warrants for the purchase of additional shares at a price of $11.00 pershare to repay its short-term debt, to fund Nevada Security Bank’s continuedgrowth, and for other reasons as described. The date of the prospectus was February 13, 2004.  The principal underwriter was D.A. Davidsonand Company of Great Falls, Montana. Further, Davidson had the option of purchasing 202,500 additional sharesand associated warrants, which option it exercised.  The subscription period closed March 22, 2004 and theapproximately $16 million net proceeds of this offering were receivedMarch 26, 2004.  The amount ofexpenses incurred for the issuers account in connection with the issuance anddistribution of the securities including underwriting discounts and commissionstotaled approximately $1.0 million.

 

**Impact of Inflation**

 

Afinancial institution’s asset and liability structure is substantiallydifferent from that of an industrial firm in that primarily all assets andliabilities of a bank are monetary in nature, with relatively little investmentin fixed assets or inventories. Inflation can have an important impact on the growth of total assets andthe resulting need to increase equity capital at higher than normal rates inorder to maintain an appropriate equity to asset ratio.  Inflation has been minimal for the pastseveral years and as such has had little or no impact on the financialcondition and results of operations of the Company during the periods discussedherein.

 

**Liquidity and Market RiskManagement**

 

TheCompany must address on a daily basis the various and sundry factors whichimpact its continuing operations.  Threeof these factors have been previously discussed:  The economic climate which encompasses our business environment,the regulatory framework that governs our practices and procedures, and creditrisk.  This section will addressliquidity risk and market risk, two additional risks specific to the operationof a financial institution that also require active management.

 

**Liquidity**

 

Theliquidity of the Company is comprised of three primary classifications:  Cash flows from or used in operatingactivities, cash flows from or used in investing activities, and cash flowsprovided by or used in financing activities. Net cash provided by or used in operating activities consists primarilyof net losses adjusted for certain non-cash income and expense items such asthe loan loss provision, investment and other amortizations and depreciation.For the twelve months ended December 31, 2003 net cash provided byoperating activities was $375,000, compared to net cash used of $1.5 millionfor the same period of 2002, which was primarily comprised of the Bank’s net lossfrom operations for the preceding twelve months. The improvement for the twelvemonths ended December 31, 2003 over the same period of 2002 was primarilyas a result of the continued growth of the Bank, and the decline in net lossesafter the first full year of operation in fiscal 2002.

 

Netcash used in investing activities, consisting primarily of purchases ofsecurities and loan funding, was $86 million and $74 million for the twelvemonths ended December 31, 2003 and 2002, respectively, all of which reflectedthe continued asset growth of the Bank.

 

Netcash provided by financing activities for all periods under reviewoverwhelmingly reflects the deposit

 

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growthof the organization.  For the twelvemonths ending December 31, 2003 the net cash provided by financingactivities was $87 million, as compared to $66 million for the same period of2002.

 

Liquidityrefers to our ability to maintain a cash flow that is adequate to fundoperations and meet obligations and other commitments in a timely andcost-effective fashion.  We requiresources of funds to meet short-term cash needs that may result from loan growthor deposit outflows, or other asset purchases or liability repayments.  These funds are traditionally made availableby drawing down from our correspondent bank deposit accounts, reducing thevolume of fed funds sold, selling securities, liquidating other assets, orborrowing funds from other institutions.

 

Theextent to which these funds are available to meet our cash needs determines ourliquidity.  In addition, should the needarise for immediate cash, we could sell either permanently or under agreementto repurchase, those investments in our portfolio which are not being pledgedas collateral.

 

Asof December 31, 2003, non-pledged securities comprised about $57 millionor 76% of our investment portfolio balances. Other forms of balance sheet liquidity on that date include vault cashand balances due from banks totaling $3.3 million, and overnight fed funds soldtotaling $2.7 million.  In addition tothe liquidity inherent in its balance sheet, we have off-balance-sheetliquidity in the form of lines of credit from correspondent banks.  Availability on these lines totaledapproximately $15 million at December 31, 2003.  We manage our liquidity in such a fashion as to be able to meetany unexpected sudden change in levels of assets or liabilities.  At December 31, 2002 non-pledgedsecurities were 72% of our investment portfolio balances, and lines of creditwere $14 million.

 

Ona long term basis, the Bank’s liquidity may be met by changing the relativedistribution of its asset portfolios, i.e., reducing investment or loanvolumes, or selling or encumbering assets. Further, it may increase liquidity by soliciting higher levels ofdeposit accounts through promotional activities, the use of deposit brokers, orborrowing from correspondents through drawing on its lines of credit.  At the current time, the long-term liquidityneeds of the Bank primarily relate to funds required to support loancommitments, lease obligations, and outsourced management information systemscontracts.  Such obligations are inaddition to the contract recently let for construction of the Bank’s thirdbranch office.  All of these needs cancurrently be met by cash flows from investment payments and maturities, andinvestment sales if needs be.

 

TheBank Holdings is a company separate and apart from Nevada Security Bank.  It must provide for its own liquidity.  At the current time, The Bank Holdingsrelies on borrowed funds to maintain its liquidity.  It is anticipated that the successful completion of a secondaryoffering which closed March 22, 2004 will allow it to gain capital withwhich it may continue its current growth, and support the continued growth ofNevada Security Bank.  Further, thiswill allow us to enhance both our capital and liquidity position although noabsolute assurance can be given, however, that this will occur.

 

**Interest Rate Risk Management**

 

Marketrisk arises from changes in interest rates, exchange rates, commodity pricesand equity prices.  The Company’s marketrisk exposure is primarily that of interest rate risk, and it has establishedpolicies and procedures to monitor and limit earnings and balance sheetexposure to changes in interest rates. The Company does not engage in trading of financial instruments, nordoes the Company have any exposure to exchange rates.

 

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Theprincipal objective of interest rate risk management (often referred to as“asset/liability management”) is to manage the financial components of theCompany in a manner that will optimize the risk/reward equation for earningsand capital in relation to changing interest rates.  To identify areas of potential exposure to rate changes, theCompany uses two firms to perform an earnings simulation analysis and a marketvalue of portfolio equity calculation on a quarterly basis.  This identifies more dynamic interest raterisk exposures that those apparent in standard re-pricing gap analyses.

 

Thecompany uses consultant’s modeling software for asset/liability management inorder to simulate the effects of potential interest rate changes on theCompany’s net interest margin.  Thesesimulations can also provide both static and dynamic information on theprojected fair market values of the Company’s financial instruments underdifferent interest rate scenarios.  Thesimulation programs utilize specific investment and call report data, andincorporates assumptions on the re-pricing characteristics of embedded optionsto determine the effects of a given interest rate change on the Company’sinterest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are runagainst the Company’s investment, loan, deposit and borrowed fundsportfolios.  These rate projections canbe shocked (an immediate and sustained change in rates, up or down), ramped (anincremental increase or decrease in rates over a specified time period),economic (based on current trends and econometric models) or stable (unchangedfrom current actual levels).  TheCompany typically uses seven standard interest rate scenarios in conducting itssimulations, four of which are provided below.

 

TheCompany’s policy is to limit the change in the Company’s net interest incomefor the next 12 months to plus or minus 5% based on a 100 basis point (b.p.)shock, plus or minus 10% based on a 200 b.p. shock, and plus or minus 15% basedon a 300 b.p. shock in interest rates.

 

SeeAppendix A Table 14 for information on the Company’s estimated net interestincome profile as of December 31, 2003.

 

Thetable illustrates that if there were an immediate downward adjustment of 200basis points in interest rates and the Company did nothing further with regardto the active management of its assets or liabilities, net interest incomewould likely decrease by around $488,000, or approximately 0.03%, over the nexttwelve months.  By the same token, ifthere were an immediate increase of 200 basis points in interest rates, theCompany’s net interest income would decline by $106,000 or 0.06% over the nextyear.  The exposure to declining ratesappears disproportionate in these simulations, however, because most of theCompany’s deposit rates are currently so close to a floor of zero.  As rates on interest-bearing liabilities hitthis floor the Company’s yields on earning assets continue to fall, creatingsignificant compression in the Company’s net interest margin.  In reality, management does not expectcurrent historically low rates to fall significantly.  In addition, the preceding interest rate simulation model doesnot represent a financial forecast and should not be relied upon as beingindicative of future results.

 

Onemethod of reviewing an institution’s likely changes in net interest income isto analyze its “gap” position.  That is,to look at the dollar volume of assets and liabilities whose interest ratesearned and paid, will be repricing in various base periods.  This repricing information is also used inthe liquidity management.  The followingtable sets forth this information for review. These repricing characteristics are the time frames within which theinterest bearing assets and liabilities are currently subject to change ininterest rates, either at replacement, repricing or maturity during the life ofthe instruments.  Interest ratesensitivity management focuses on the repricing characteristics and thematurity structure of assets and liabilities during periods of changes inmarket interest rates.  Effectiveinterest rate sensitivity management seeks to examine how and when assets andliabilities respond to changes in interest rates, and quantify the impact ofinterest rate changes on net interest income. Interest rate sensitivity is measured as the difference between thevolumes of assets and liabilities in our current portfolios that are subject torepricing at various time horizons: immediate; within three months; over threeto twelve months; one to five years; over five years, and on a cumulativebasis.  The differences are known asinterest rate sensitivity gaps.

 

Asshown in Appendix A Table 15 Interest Rate Sensitivity Gap, during the firstthree months,

 

40

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approximately89% of interest bearing liabilities could reprice, compared with 32% of allinterest earning assets.  This would becharacterized as a negative gap, that is, more liabilities reprice in thisperiod than assets.  A positive gapimplies that more assets than liabilities reprice in a given time frame, andthe intuitive reaction would be that in a falling rate environment, it would bemore beneficial to be negatively gapped; that is, interest bearing liabilitiesdrop in price faster than interest earning assets, and in a rising interestrate environment it would be better to have interest earning assets repricequicker than interest bearing liabilities, thereby creating additionalshort-term income.

 

Ashort term positive net interest income effect would occur in either instance,based on the positive gap in a falling rate environment, or a negative gap in arising interest rate environment, at least until all interest bearingliabilities or assets are repriced in respect to their maturities, and theenhanced net interest margin is reduced. However, loan and deposit portfolio repricing periods do not bringautomatic short-term increases or decreases in the net interest margin, becauserates may not be adjusted concurrently with market condition changes, and maybe “sticky” in either direction.

 

Changesin the mix of earning assets or interest bearing liabilities can eitherincrease or decrease the net interest margin without affecting interest ratesensitivity.  In addition, the interestrate spread between an asset and its supporting liability can varysignificantly while the timing of repricing for both the asset and theliability remains the same, thereby impacting net interest income.  This characteristic is referred to as basisrisk and general relates to the possibility that the repricing characteristicsof short-term assets tied to various indexes are different from those offunding sources.  Varying interest rateenvironments can create unexpected changes in prepayment volumes of assets, andpre-maturity demands for liabilities that are not reflected in the interestrate sensitivity analysis.  Thesecustomer originated prepayments may have a significant impact on our netinterest margin.  Because of thesefactors, an interest rate sensitivity gap analysis may not provide an accurateassessment of our exposure to changes in interest rates and we use modelingsoftware to more accurately reflect interest rate risk.

 

**ITEM 7****.     CONSOLIDATED FINANCIAL STATEMENTS**

 

Thefollowing financial statements and independent auditors’ reports listed beloware included herein:

 
| I  a.  |   | Independent Auditor’s  Report from McGladrey & Pullen LLP                                                                                                         |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                       |   |
| II.    |   | Consolidated Balance Sheets  – December 31, 2003 and 2002                                                                                                        |   |
|   |   |                                                                                                                                                                       |   |
| III.   |   | Consolidated  Statements of Operations – Years Ended December 31, 2003, 2002, and the  period from inception to December 31, 2001                           |   |
|   |   |                                                                                                                                                                       |   |
|   |   |                                                                                                                                                                       |   |
| IV.    |   | Consolidated  Statements of Changes in Shareholders’ Equity – Years Ended December 31,  2003, 2002, and the period from inception to December 31, 2001 |   |
|   |   |                                                                                                                                                                       |   |
|   |   |                                                                                                                                                                       |   |
| V.     |   | Consolidated  Statements of Cash Flows – Years Ended December 31, 2003, 2002, and the  period from inception to December 31, 2001                           |   |
|   |   |                                                                                                                                                                       |   |
|   |   |                                                                                                                                                                       |   |
| VI.    |   | Notes to the  Consolidated Statements                                                                                                                                      |   |

 

41

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**IndependentAuditor’s Report**

 

To the Board of Directors

The Bank Holdings

Reno, Nevada

 

We have audited the accompanying consolidated balance sheets of TheBank Holdings and its wholly owned subsidiary, Nevada Security Bank(collectively referred to herein as the Company) as of December 31, 2003and 2002, and the related statements of operations, stockholders’ equity andcash flows for the years ended December 31, 2003 and 2002, and from thedate of inception (February 26, 2001) through December 31, 2001.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on the financial statements basedon our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of the Company as ofDecember 31, 2003 and 2002, and the results of its operations and its cashflows for the years ended December 31, 2003 and 2002, and from the date ofinception (February 26, 2001) through December 31, 2001, inconformity with accounting principles generally accepted in the United Statesof America.

 

 
|                                                                                     | McGladrey & Pullen, LLP |
|------------------------------------------------------------------------------------------|-----------------------------|
|                                                                                     |                        |
|                                                                                     |                        |
| Las Vegas, Nevada                                                                        |
| February 20, 2004, except for Note 17, as to which the date is  March 22, 2004 |

 

42

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**THEBANK HOLDINGS AND SUBSIDIARYConsolldated Balance Sheets**

 
|                                                                                            |   | **December 31,**                  |    |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                                                            |   | **2003**                               |    | **2002** |   |
|                                                                                            |   | **(in  thousands, except share data)** |    |
| **ASSETS**                                                                                      |   |                                   |    |   |   |
|                                                                                            |   |                                   |    |   |   |
| Cash and due from banks                                                                         |   | $                                      | 3,305   |   | $ | 2,129 |   |
| Federal funds sold                                                                              |   | 2,655                                  |    | 2,005 |   |
| Cash and cash equivalents                                                                       |   | 5,960                                  |    | 4,134 |   |
| Securities available for sale                                                                   |   | 36,913                                 |    | 13,393 |   |
| Securities held to maturity                                                                     |   | 37,850                                 |    | 34,599 |   |
| Other equity securities, at cost                                                                |   | 427                                    |    | 51 |   |
| Loans, net of allowance for loan losses of  $822 and $220                                       |   | 81,625                                 |    | 24,612 |   |
| Premises and equipment, net                                                                     |   | 2,069                                  |    | 2,174 |   |
| Other assets                                                                                    |   | 1,305                                  |    | 713 |   |
| **TOTAL ASSETS**                                                                                |   | $                                      | 166,149 |   | $ | 79,676 |   |
|                                                                                            |   |                                   |    |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                  |   |                                   |    |   |   |
| Deposits:                                                                                       |   |                                   |    |   |   |
| Noninterest bearing demand                                                                      |   | $                                      | 23,274  |   | $ | 10,397 |   |
| Interest bearing demand                                                                         |   | 7,295                                  |    | 3,657 |   |
| Savings                                                                                         |   | 1,855                                  |    | 1,010 |   |
| Money Market                                                                                    |   | 87,019                                 |    | 40,226 |   |
| IRA’s                                                                                      |   | 807                                    |    | 337 |   |
| Time deposits < $100                                                                         |   | 5,958                                  |    | 3,810 |   |
| Time deposits > $100                                                                         |   | 22,539                                 |    | 7,833 |   |
| Total deposits                                                                                  |   | 148,747                                |    | 67,270 |   |
| Other borrowed funds                                                                            |   | 6,125                                  |    | 15 |   |
| Accrued expenses and other liabilities                                                          |   | 424                                    |    | 396 |   |
| Total Liabilities                                                                               |   | 155,296                                |    | 67,681 |   |
|                                                                                            |   |                                   |    |   |   |
| Commitments and contingencies (Note 9)                                                          |   |                                   |    |   |   |
|                                                                                            |   |                                   |    |   |   |
| Stockholders’ equity:                                                                      |   |                                   |    |   |   |
| Preferred stock, $.01 par value, 20,000,000  shares authorized; no shares issued or outstanding |   | —                                 |    | — |   |
| Common stock, $.01 par value, 20,000,000  authorized; 1,405,930 issued and outstanding          |   | 14                                     |    | 14 |   |
| Surplus                                                                                         |   | 13,998                                 |    | 13,998 |   |
| Accumulated deficit                                                                             |   | (2,898                                 | )       | (2,333 | ) |
| Accumulated other comprehensive  income/(loss)                                                  |   | (261                                   | )       | 316 |   |
| Total stockholders’ equity                                                                 |   | 10,853                                 |    | 11,995 |   |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                            |   | $                                      | 166,149 |   | $ | 79,676 |   |

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

43

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**THEBANK HOLDINGS AND SUBSIDIARYConsolidated Statements ofOperations**

 
|                                                  |   | **Periods  Ended December 31,**       |   |
|-------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                  |   | **2003**                                   |   | **2002** |   | **2001** |   |
|                                                  |   | **(in  thousands, except per share data)** |   |
|                                                  |   |                                       |   |   |   |   |   |
| **Interest income:**                                  |   |                                       |   |   |   |   |   |
| Federal funds sold and other                          |   | $                                          | 68     |   | $ | 159 |   | $ | 218 |   |
| Debt securities, taxable                              |   | 1,932                                      |   | 1,187 |   | — |   |
| Debt securities, non-taxable                          |   | 12                                         |   | — |   | — |   |
| Dividends                                             |   | 5                                          |   | 1 |   | — |   |
| Loans, including fees                                 |   | 3,233                                      |   | 601 |   | — |   |
| **Total interest and  dividend income**               |   | 5,250                                      |   | 1,948 |   | 218 |   |
|                                                  |   |                                       |   |   |   |   |   |
| **Interest expense:**                                 |   |                                       |   |   |   |   |   |
| Deposits                                              |   | 1,842                                      |   | 756 |   | — |   |
| Other borrowed funds                                  |   | 51                                         |   | 3 |   | 4 |   |
| **Total interest  expense**                           |   | 1,893                                      |   | 759 |   | 4 |   |
|                                                  |   |                                       |   |   |   |   |   |
| **Net interest income**                               |   | 3,357                                      |   | 1,189 |   | 214 |   |
|                                                  |   |                                       |   |   |   |   |   |
| Provision for loan losses                             |   | 602                                        |   | 220 |   | — |   |
| Net interest income, after provision for  loan losses |   | 2,755                                      |   | 969 |   | 214 |   |
|                                                  |   |                                       |   |   |   |   |   |
| **Noninterest income:**                               |   |                                       |   |   |   |   |   |
| Service charges on deposit accounts                   |   | 75                                         |   | 24 |   | — |   |
| Other service charges, commissions and fees           |   | 97                                         |   | 44 |   | — |   |
| Pre-underwriting fees                                 |   | 224                                        |   | — |   | — |   |
| Net gain on sale of available for sale  securities    |   | 497                                        |   | 9 |   | — |   |
| **Total noninterest  income**                         |   | 893                                        |   | 77 |   | — |   |
|                                                  |   |                                       |   |   |   |   |   |
| **Noninterest  expense:**                             |   |                                       |   |   |   |   |   |
| Salaries and employee benefits                        |   | 2,024                                      |   | 1,276 |   | 408 |   |
| Occupancy and equipment                               |   | 896                                        |   | 564 |   | 202 |   |
| Data processing                                       |   | 200                                        |   | 102 |   | 39 |   |
| Deposit services costs                                |   | 152                                        |   | 97 |   | 3 |   |
| Legal and accounting                                  |   | 163                                        |   | 161 |   | 2 |   |
| Other professional Services                           |   | 139                                        |   | 98 |   | 18 |   |
| Telphone and data Communication                       |   | 114                                        |   | 72 |   | 2 |   |
| Other                                                 |   | 525                                        |   | 441 |   | 108 |   |
| **Total noninterest  expense**                        |   | 4,213                                      |   | 2,811 |   | 782 |   |
|                                                  |   |                                       |   |   |   |   |   |
| **Net loss**                                          |   | $                                          | (565   | ) | $ | (1,765 | ) | $ | (568 | ) |
|                                                  |   |                                       |   |   |   |   |   |
| Net loss per share:                                   |   |                                       |   |   |   |   |   |
| Basic and diluted                                     |   | $                                          | (0.40  | ) | ($1.26 | ) | ($0.40 | ) |

 

Theaccompanying notes are an integral part of these consolidated financialstatements. 

 

44

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**THEBANK HOLDINGS AND SUBSIDIARYConsolidated Statements ofStockholders’ EquityPeriods Ended December 31, 2003, 2002 and 2001**

 
|                                                                                |   | **Comprehensive  Loss**                |    | **Shares of  Common  Stock** |   | **Common  Stock** |   | **Surplus** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total** |   |
|-------------------------------------------------------------------------------------|--------|----------------------------------------|---------|------------------------------|--------|-------------------|--------|-------------|--------|--------------------------|--------|------------------------------------------------------|--------|-----------|--------|
|                                                                                |   | **(in  thousands, except share data)** |    |
|                                                                                |   |                                   |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| **Balance at date of inception  (February 26, 2001)**                          |   |                                   |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Proceeds from issuance of common stock, net of  offering costs of approximately $47 |   |                                   |    | 1,405,830                    |   | $                 | 14     |        | $      | 13,997                   |   | $                                                    | — |      | $      | — |   | $ | 14,011 |   |
|                                                                                |   |                                   |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Net loss                                                                            |   | $                                      | (568    | )                            | — |              | — |        | — |                     | (568   | )                                                    | — |      | (568   | ) |
| **Balance at December 31, 2001**                                               |   |                                   |    | 1,405,830                    |   | 14                |   | 13,997      |   | (568                     | )      |                                                 |   | 13,443    |   |
| Proceeds from issuance of common stock, net                                         |   |                                   |    | 100                          |   | —            |   | 1           |   |                     |   |                                                 |   | 1         |   |
|                                                                                |   |                                   |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Net loss                                                                            |   | $                                      | (1,765  | )                            | — |              | — |        | — |                     | (1,765 | )                                                    | — |      | (1,765 | ) |
| Other comprehensive loss:                                                           |   |                                   |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Unrealized holding gain on securities available  for sale arising during the year   |   | 325                                    |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Less reclassification adjustment for gains  included in net loss                    |   | (9                                     | )       |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Net unrealized holding gains                                                        |   | 316                                    |    | —                       |   | —            |   | —      |   | —                   |   | 316                                                  |   | 316       |   |
| Comprehensive loss                                                                  |   | $                                      | (1,449) |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |   |
| **Balance at December 31, 2002**                                               |   |                                   |    | 1,405,930                    |   | 14                |   | 13,998      |   | (2,333                   | )      | 316                                                  |   | 11,995    |   |
|                                                                                |   |                                   |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Net loss                                                                            |   | $                                      | (565    | )                            | — |              | — |        | — |                     | (565   | )                                                    | — |      | (565   | ) |
| Other comprehensive loss:                                                           |   |                                   |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Unrealized holding loss on securities available  for sale arising during the year   |   | (80                                    | )       |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Less reclassification adjustment for gains  included in net loss                    |   | (497                                   | )       |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| Net unrealized holding losses                                                       |   | (577                                   | )       | —                       |   | —            |   | —      |   | —                   |   | (577                                                 | )      | (577      | )      |
| Comprehensive loss                                                                  |   | $                                      | (1,142  | )                            |   |              |   |        |   |                     |   |                                                 |   |      |   |   |
|                                                                                |   |                                   |    |                         |   |              |   |        |   |                     |   |                                                 |   |      |   |
| **Balance at December 31, 2003**                                               |   |                                   |    | 1,405,930                    |   | $                 | 14     |        | $      | 13,998                   |   | $                                                    | (2,898 | )         | $      | (261 | ) | $ | 10,853 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

45

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**THEBANK HOLDINGS AND SUBSIDIARYConsolidated Statements of Cash Flows**

 
|                                                                                   |   | **Periods  Ended December 31,** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                   |   | **2003**                             |   | **2002** |   | **2001** |   |
|                                                                                   |   | **(in  thousands)**                  |   |
|                                                                                   |   |                                 |   |   |   |   |   |
| **Cash flows from  operating activities:**                                             |   |                                 |   |   |   |   |   |
| Net loss                                                                               |   | $                                    | (565   | ) | $ | (1,765 | ) | $ | (568 | ) |
| Adjustments to reconcile net loss to cash  provided by (used in) operating activities: |   |                                 |   |   |   |   |   |
| Provision for loan losses                                                              |   | 602                                  |   | 220 |   | — |   |
| Net amortization of securities                                                         |   | 928                                  |   | 255 |   | — |   |
| Depreciation                                                                           |   | 353                                  |   | 189 |   | — |   |
| Realized gain on sales of available for  sale securities, net                          |   | (497                                 | )      | (9 | ) | — |   |
| Net change in:                                                                         |   |                                 |   |   |   |   |   |
| Other assets and liabilities, net                                                      |   | (446                                 | )      | (418 | ) | 102 |   |
| **Net cash provided  by (used in) operating activities**                               |   | 375                                  |   | (1,528 | ) | (466 | ) |
|                                                                                   |   |                                 |   |   |   |   |   |
| **Cash flows from investing  activities:**                                             |   |                                 |   |   |   |   |   |
| Activity in available for sale securities:                                             |   |                                 |   |   |   |   |   |
| Proceeds from sales, maturities,  prepayments and calls                                |   | 20,978                               |   | 274 |   | — |   |
| Purchases                                                                              |   | (44,730                              | )      | (13,340 | ) | — |   |
| Activity of securities held to maturity:                                               |   |                                 |   |   |   |   |   |
| Proceeds from maturities, prepayments and  calls                                       |   | 31,034                               |   | 9,945 |   | — |   |
| Purchases                                                                              |   | (35,061                              | )      | (44,801 | ) | — |   |
| Purchases of equity securities                                                         |   | (376                                 | )      | (51 | ) | — |   |
| Loan originations and principal  collections, net                                      |   | (57,615                              | )      | (24,832 | ) | — |   |
| Purchases of premises and equipment                                                    |   | (248                                 | )      | (1,680 | ) | (643 | ) |
| **Net cash used  in  investing activities**                                       |   | (86,018                              | )      | (74,485 | ) | (643 | ) |
|                                                                                   |   |                                 |   |   |   |   |   |
| **Cash flows from  financing activities:**                                             |   |                                 |   |   |   |   |   |
| Net increase in deposits                                                               |   | 81,477                               |   | 66,513 |   | 757 |   |
| Proceeds from from issuance of short term  debt                                        |   | 6,125                                |   | — |   | — |   |
| Payments on capital lease obligation                                                   |   | (15                                  | )      | (20 | ) | (6 | ) |
| Stock issuance costs capitalized pending  stock issuance                               |   | (118                                 | )      | — |   | — |   |
| Net proceeds from issuance of common stock                                             |   | —                               |   | 1 |   | 14,011 |   |
| **Net cash provided  by financing activities**                                         |   | 87,469                               |   | 66,494 |   | 14,762 |   |
|                                                                                   |   |                                 |   |   |   |   |   |
| **Net change in cash  and cash equivalents**                                           |   | 1,826                                |   | (9,519 | ) | 13,653 |   |
|                                                                                   |   |                                 |   |   |   |   |   |
| **Cash and cash  equivalents at beginning of period**                                  |   | 4,134                                |   | 13,653 |   | — |   |
| **Cash and cash  equivalents at end of period**                                        |   | $                                    | 5,960  |   | $ | 4,134 |   | $ | 13,653 |   |
|                                                                                   |   |                                 |   |   |   |   |   |
| Supplementary cash flow information:                                                   |   |                                 |   |   |   |   |   |
| Interest paid on deposits and borrowed  funds                                          |   | $                                    | 1,898  |   | $ | 731 |   | $ | 4 |   |
| Equipment acquired under capital lease  obligation                                     |   | $                                    | — |   | $ | — |   | $ | 40 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

46

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**THE BANK HOLDINGS AND SUBSIDIARY**

**Notesto Consolidated Financial Statements**

 

**NOTE 1 – SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

***Principles ofConsolidation and Basis of Presentation***

On July 9, 2003, the stockholders of Nevada Security Bank approvedthe exchange of their common stock in Nevada Security Bank for common stock inthe newly formed holding company, The Bank Holdings.  This transaction was consummated on August 29, 2003 andaccounted for at historical cost. The consolidated financial statements includethe accounts of The Bank Holdings and its wholly-owned subsidiary, NevadaSecurity Bank.  Nevada Security Bank wasorganized on February 26, 2001 and opened for business onDecember 27, 2001. All significant intercompany balances and transactionshave been eliminated in consolidation.

 

***Nature of BankingActivities***

The Bank Holdings is a bank holding company, providing a full range ofbanking services to commercial and consumer customers through its wholly ownedsubsidiary, Nevada Security Bank (the Bank), which has two branches located inReno and Incline Village, Nevada, and a loan production office in RanchoCordova, California.  These entities arecollectively referred to herein as the Company.  At the present time, the Company has no other operatingsubsidiaries.  Segment information isnot presented since principally all of the Company’s revenues are attributableto one reportable segment.  Theaccounting and reporting policies of the Company conform to accountingprinciples generally accepted in the United States of America and generalpractices within the banking industry.

 

***Use of Estimates***

In preparing consolidated financial statements in conformity withgenerally accepted accounting principles, in the United States of America,requires management to make estimates and assumptions that affect the reportedamount of assets and liabilities as of the date of the balance sheet andreported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Material estimates that areparticularly susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses.

 

***Cash and CashEquivalents***

Forpurposes of the consolidated statements of cash flows, cash and cashequivalents include cash on hand, amounts due from banks (including cash itemsin the process of clearing), and federal funds sold.  Cash flows from loans, deposits, and proceeds from issuance ofcommon stock are reported net.

 

TheCompany maintains amounts on account with other institutions which, at times,may exceed federally insured limits. The Company has not experienced any losses on such accounts.

 

***Securities***

Debt securities that management has the positive intent and ability tohold to maturity are classified as “held to maturity” and recorded at amortizedcost.  Securities not classified as heldto maturity including equity securities with readily determinable fair valuesare classified as “available for sale” and are recorded at fair value, with unrealizedgains and losses excluded from earnings and reported in other comprehensiveincome.

 

Purchase premiums and discounts are recognized in interest income usingthe interest method over the terms of the securities.  Declines in the fair value of held-to-maturity andavailable-for-sale securities below their cost that are deemed to be other thantemporary are reflected in

 

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earnings as realized losses.  Inestimating other-than-temporary impairment losses, management considers (1) thelength of time and the extent to which the fair value has been less than cost,(2) the financial condition and near-term prospects of the issuer, and (3) theintent and ability of the Company to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in fairvalue.  Gains and losses on the sale ofsecurities are recorded on the trade date and are determined using the specificidentification method.

 

***Loans***

The Company grants real estate, commercial and consumer loans tocustomers.  A substantial portion of theloan portfolio is represented by real estate loans throughout northern Nevadaand northern California.  The ability ofthe Company’s debtors to honor their contracts is dependent upon the realestate and general economic conditions in these areas.

 

Loans are reported at their outstanding unpaid principal balancesreduced by the allowance for loan losses, and any deferred fees or costs onoriginated loans.  Interest income isaccrued on the unpaid principal balance.

 

***Allowance for LoanLosses***

The allowance for loan losses is established as losses are estimated tohave occurred through a provision for loan losses charged to expense.  Loan losses are charged against theallowance when management believes the collectibility of a loan balance isunlikely.  Subsequent recoveries, ifany, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis bymanagement and is based upon management’s periodic review of the collectibilityof the loans in light of historical peer bank experience, the nature and volumeof the loan portfolio, adverse situations that may affect the borrower’sability to repay, estimated value of any underlying collateral and prevailingeconomic conditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

The allowance consists of specific and general components.  The specific component relates to loans thatare classified as doubtful, substandard or special mention.  For such loans that are also classified asimpaired, an allowance is established when the discounted cash flows (or collateralvalue or observable market price) of the impaired loan is lower than thecarrying value of that loan.  Thegeneral component covers non-classified loans and is based on historical peerbank loss experience adjusted for qualitative factors.

 

A loan is considered impaired when, based on current information andevents, it is probable that the Company will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement.  Factors consideredby management in determining impairment include payment status, collateralvalue, and the probability of collecting scheduled principal and interestpayments when due. Loans that experience insignificant payment delays andpayment shortfalls generally are not classified as impaired.

 

Management determines the significance of payment delays and paymentshortfalls on a case-by-case basis, taking into consideration all of thecircumstances surrounding the loan and the borrower, including the length ofthe delay, the reasons for the delay, the borrower’s prior payment record, andthe amount of the shortfall in relation to the principal and interestowed.  Impairment is measured on a loanby loan basis for commercial and construction loans by either the present valueof expected future cash flows discounted at the loan’s effective interest rate,the

 

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loan’s obtainable market price, or the fair value of the collateral ifthe loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectivelyevaluated for impairment.  Accordingly,the Company does not separately identify individual consumer and residentialloans for impairment disclosures, unless such loans are the subject of arestructuring agreement.

 

# ***Interest and fees on loans***

Interest on loans is recognized over the terms of the loans and iscalculated under the effective interest method.  The accrual of interest on impaired loans is discontinued when,in management’s opinion, the borrower may be unable to make payments as theybecome due.

 

The Company determines a loan to be delinquent when payments have notbeen made according to contractual terms, typically evidenced by nonpayment ofa monthly installment by the due date. The accrual of interest on loans is discontinued at the time the loan is90 days delinquent unless the credit is well secured and in the process ofcollection.  Personal loans aretypically charged off no later than 180 days delinquent.

 

All interest accrued but not collected for loans that are placed onnon-accrual are reversed against interest income.  The interest on these loans is accounted for on the cash-basis orcost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status whenall the principal and interest amounts contractually due are brought currentand future payments are reasonably assured.

 

Loan origination and commitment fees and certain direct loanorigination costs are deferred and the net amount amortized as an adjustment tothe related loan’s yield.  The Bank isgenerally amortizing these amounts over the contractual life of the loan.  Commitment fees, based upon a percentage ofa customer’s unused line of credit, and fees related to standby letters ofcredit are recognized over the commitment period.

 

# ***Transfers of FinancialAssets***

Transfers of financial assets are accounted for as sales, when controlover the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) theassets have been isolated from the Company, (2) the transferee obtains theright (free of conditions that constrain it from taking advantage of thatright) to pledge or exchange the transferred assets, and (3) the Company doesnot maintain effective control over the transferred assets through an agreementthat both entities and obligates the Company to repurchase them before theirmaturity.

 

***Premises andEquipment***

Premises and equipment are carried at cost, less accumulateddepreciation computed on the straight-line method over the following estimatedlives of the assets.

 
| Furniture and Equipment |   | 3 – 20 years |   |
|-------------------------|--------|-------------------|--------|
| Automobiles             |   | 3 years           |   |

 

Amortization of leasehold improvements is computed principally by thestraight line method over the term of the lease or the estimated useful life ofthe assets, whichever is shorter. Amortization expense on assets acquired under capital leases, which arebeing amortized over the lease terms, is included with depreciation expense onowned assets.

 

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# ***Other Equity Securities***

The Company, as a member of the Federal Home Loan Bank (FHLB) system,is required to maintain an investment in capital stock of the FHLB in an amountequal to the greater of 1% of its outstanding home loans or 5% of advances fromthe FHLB.  The recorded amount of theFHLB stock equals its fair value because the shares can only be redeemed by theFHLB at the $100 per share par value. The Company also has an investment in the Pacific Coast Bankers Bancorp(PCBB) its correspondent bank, to facilitate transactions between the twocompanies.

 

***Organization andStart-up Costs***

Organization and start-up costs were charged to operations as they wereincurred pursuant to Statement of Position 98-5 *Reporting on the Costs of Start-upActivities*.  Organization andstart-up costs charged to operations in the period ended December 31, 2001were approximately $773 thousand, including interest expense of approximately$4 thousand.  Interest earned ininterest-bearing accounts on pre-opening funds was approximately $215 thousandfor the period ending December 31, 2001.

 

***Pre-underwritingfees***

The Company has agreements with third parties under which the Companyperforms certain pre-underwriting activities on SBA loans which are funded bythe third party. These activities are conducted in the Silverado Fundingdivision, located in the Ranch Cordova loan production facility.  Half of these fees are recognized as incomeupon receipt of the funds.  The Companywould be required to refund the fee in the event of delinquency, default, orearly payoff during the first six months of the loan term.  Management records a liability equal to 50%of the fee  at the date the fee isreceived.  This liability is reducedratably over the six month contingency period.

 

***Income Taxes***

Deferred income tax assets and liabilities are determined using theliability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determinedbased on the tax effects of the temporary differences between the book and taxbases of the various balance sheet assets and liabilities and gives currentrecognition to changes in tax rates and laws. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets may not be realized. Deferred taxes and liabilities are adjusted for the effect of changes intax laws and rates on the date of enactment.

 

***Stock CompensationPlan***

At December 31, 2003, the Company has a stock-based employeecompensation plan, which is more fully described in Note 12.  The Company accounts for the plan using therecognition and measurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations.  Accordingly, no stock-based employeecompensation cost has been reflected in net loss, as all options granted underthe plan had an exercise price equal to the market value of the underlyingcommon stock on the grant date.  Thefollowing table illustrates the effect on net loss and loss per common share ifthe Company had applied the fair value recognition provisions of FASB StatementNo. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 

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|                                                                                                     |   | **Year Ended  December 31,** |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                     |   | **2003**                          |   | **2002** |   |
| Net Loss:                                                                                                |   |                              |   |   |   |
| As reported                                                                                              |   | $                                 | (565   | ) | $ | (1,765 | ) |
| Total stock-based employee compensation  expense determined under fair value based method for all awards |   | (140                              | )      | (102 | ) |
|                                                                                                     |   |                              |   |   |   |
| Pro- forma net loss                                                                                      |   | $                                 | (705   | ) | $ | (1,867 | ) |
|                                                                                                     |   |                              |   |   |   |
| Basic and diluted loss per share                                                                         |   |                              |   |   |   |
| As reported                                                                                              |   | $                                 | (.40   | ) | $ | (1.26 | ) |
| Pro forma                                                                                                |   | $                                 | (.50   | ) | $ | (1.33 | ) |

 

# ***Losses Per Common Share***

Basic losses per share represent net loss divided by theweighted-average number of common shares outstanding during the period.  Because we reported net losses in 2003, 2002and 2001, all potentially dilutive securities were anti-dilutive and basic anddiluted loss per share were the same in those periods.

 

Losses percommon share have been computed based on the following:

 

Components used in computing loss per share for the year endedDecember 31, 2003 are summarized as follows:

 
| **Basic Loss per Share**              |   | **Loss  (Numerator)** |   | **Shares  (Denominator)** |      | **Per-Share  Amount** |   |
|---------------------------------------|--------|-----------------------|--------|---------------------------|-----------|-----------------------|--------|
| Loss available to common shareholders |   | $                     | (565   | )                         | 1,405,930 |                  | $      | (.40 | ) |
|                                       |        |                       |        |                           |           |                       |        |  |  |

 

# ***Components usedin computing loss per share for the year ended December 31, 2002 aresummarized as follows:***

 
| **Basic Loss per Share**              |   | **Loss  (Numerator)** |   | **Shares  (Denominator)** |      | **Per-Share  Amount** |   |
|---------------------------------------|--------|-----------------------|--------|---------------------------|-----------|-----------------------|--------|
| Loss available to common shareholders |   | $                     | (1,765 | )                         | 1,405,838 |                  | $      | (1.26 | ) |
|                                       |        |                       |        |                           |           |                       |        |  |  |

# *** ***

# ***Components usedin computing loss per share for the period ended December 31, 2001 aresummarized as follows:***

 
| **Basic Loss per Share**              |   | **Loss  (Numerator)** |   | **Shares  (Denominator)** |      | **Per-Share  Amount** |   |
|---------------------------------------|--------|-----------------------|--------|---------------------------|-----------|-----------------------|--------|
| Loss available to common shareholders |   | $                     | (568   | )                         | 1,405,830 |                  | $      | (.40 | ) |
|                                       |        |                       |        |                           |           |                       |        |  |  |

 

 

# ***Off-Balance SheetInstruments***

In the ordinary course of business, the Company has entered intooff-balance sheet instruments consisting of commitments to extend credit.  Such financial instruments are recorded inthe financial statements when they are funded.

 

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***Comprehensive Income***

Accounting principles generally require that recognized revenue,expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities, such asunrealized gains and losses on available-for-sale securities, are reported as aseparate component of the equity section of the balance sheet, such items,along with net income, are components of comprehensive income.

 

***Recent AccountingPronouncements***

 

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On November 25, 2003, FASB’s Emerging Issues Task Force (EITF)ratified a consensus decision on new disclosure requirements related tounrealized losses on investment securities applicable to fiscal years endingafter December 15, 2003 requiring institutions covered by FAS 115 toinclude certain disclosures in 2003 annual reports.  Unrealized losses on investment securities must be summarized intable format, distinguishing between securities in a continuous unrealized lossposition for 12 months or more and securities in a continuous unrealized lossposition for 12 months or less, including aggregate unrealized losses ofsecurities whose fair values are below book values as of the reporting date andthe aggregate fair value of securities whose fair values are below book valuesas of the reporting date.  Additionalinformation recommended for inclusion in narrative form includes the nature ofthe investment, the cause(s) of impairment(s), the number of investmentpositions that are in an unrealized loss position, and the severity andduration of impairment(s). See Note 2.

 

# ***Reclassification***

Various reclassifications have been made to the consolidated balance sheetat December 31, 2002 and the consolidated statements of operations for theperiods ended December 31, 2002 and 2001 in order to be consistent withthe presentation as of December 31, 2003. There was no change to previously reported stockholders’ equity or netloss.

 

**NOTE 2 – RESTRICTIONSON CASH AND AMOUNT DUE FROM BANKS**

 

The Company is required to maintain average balances on hand or withthe Federal Reserve Bank.  AtDecember 31, 2003 and 2002, these reserve balances amounted toapproximately $473 thousand and $139 thousand, respectively.

 

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**NOTE 3 – SECURITIES**

 

The amortized cost and fair value of securities with gross unrealizedgains and losses are as follows:

 
|                                |   | **December 31,  2003** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **Amortized  Cost**         |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Loss** |   | **Fair Value** |   |
|                                |   | **(Dollars  in thousands)** |   |
| Securities available-for-sale       |   |                        |   |   |   |   |   |   |   |
| U.S. Government and federal agency  |   | $                           | 24,515 |   | $ | 26 |   | $ | (326 | ) | $ | 24,215 |   |
| State and municipal                 |   | 627                         |   | 2 |   | (10 | ) | 619 |   |
| Corporate                           |   | 12,032                      |   | 62 |   | (15 | ) | 12,079 |   |
| Total securities available-for-sale |   | $                           | 37,174 |   | $ | 90 |   | $ | (351 | ) | $ | 36,913 |   |
|                                |   |                        |   |   |   |   |   |   |   |
| Securities Held to Maturity         |   |                        |   |   |   |   |   |   |   |
| U.S. Government and federal agency  |   | $                           | 6,153  |   | $ | 50 |   | $ | — |   | $ | 6,203 |   |
| State and municipal                 |   | 248                         |   | 39 |   | — |   | 287 |   |
| Corporate                           |   | 1,775                       |   | 135 |   | — |   | 1,910 |   |
| Mortgage-backed                     |   | 29,674                      |   | 142 |   | (278 | ) | 29,538 |   |
| Total securities held to maturity   |   | $                           | 37,850 |   | $ | 366 |   | $ | (278 | ) | $ | 37,938 |   |

 
|                                |   | **December 31,  2002** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **Amortized  Cost**         |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Loss** |   | **Fair Value** |   |
|                                |   | **(Dollars  in thousands)** |   |
| Securities available-for-sale       |   |                        |   |   |   |   |   |   |   |
| U.S. Government and federal agency  |   | $                           | 1,134  |   | $ | 15 |   | $ | — |   | $ | 1,149 |   |
| Corporate                           |   | 11,943                      |   | 361 |   | (60 | ) | 12,244 |   |
| Total securities available-for-sale |   | $                           | 13,077 |   | $ | 376 |   | $ | (60 | ) | $ | 13,393 |   |
|                                |   |                        |   |   |   |   |   |   |   |
| Securities Held to Maturity         |   |                        |   |   |   |   |   |   |   |
| U.S. Government and federal agency  |   | $                           | 11,574 |   | $ | 129 |   | $ | (4 | ) | $ | 11,699 |   |
| Corporate                           |   | 1,771                       |   | 91 |   | (6 | ) | 1,856 |   |
| Mortgage-backed                     |   | 21,254                      |   | 215 |   | (53 | ) | 21,416 |   |
| Total securities held to maturity   |   | $                           | 34,599 |   | $ | 435 |   | $ | (63 | ) | $ | 34,971 |   |

 

At December 31, 2003 and 2002, held to maturity securities with acarrying value of $17.949 million and $34.599 million, respectively, werepledged as collateral or for other purposes as required or permitted by law.

 

The amortized cost and fair value of debt securities by contractualmaturity at December 31, 2003 is shown below. Over certain interest rateenvironments, some, or all of these securities may be called for redemption bytheir issuers prior to the scheduled maturities. Further, maturities within themortgage-backed securities portfolio may differ from scheduled and contractualmaturities because the mortgages underlying the securities may be called forredemption or repaid without

 

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penalties. Therefore, these securities are not included in the maturitycategories in the following maturity summary.

 
|                           |   | **Available  for Sale** |   | **Held to  Maturity** |   |
|--------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                           |   | **Amortized  Cost**     |   | **Fair Value**        |   | **Amortized  Cost** |   | **Fair Value** |   |
| Within 1 year                  |   | $                       | — |                  | $      | — |   | $ | 1,505 |   | $ | 1,514 |   |
| After 1 year through 5 years   |   | 23,964                  |   | 23,952                |   | 1,714 |   | 1,756 |   |
| After 5 years through 10 years |   | 13,210                  |   | 12,961                |   | 4,409 |   | 4,542 |   |
| After 10 years                 |   | —                  |   | —                |   | 548 |   | 588 |   |
| Mortgaged-backed securities    |   | —                  |   | —                |   | 29,674 |   | 29,538 |   |
|                           |   | $                       | 37,174 |                  | $      | 36,913 |   | $ | 37,850 |   | $ | 37,938 |   |

 

 

For the years ended December 31, 2003 and 2002, gross realizedgains from sales of securities available for sale were approximately $497thousand and $9 thousand, respectively. There were no sales of securities in 2001.

 

Information pertaining to securities with gross unrealized losses atDecember 31, 2003, aggregated by investment category and length of timethat individual securities have been in a continuous loss position, is asfollows:

 
|                                |   | **Less Than  Twelve Months**  |   | **Over  Twelve Months** |   |
|-------------------------------------|--------|-------------------------------|--------|-------------------------|--------|
|                                |   | **Gross  Unrealized  Losses** |   | **Fair Value**          |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|                                |   | **(Dollars  in thousands)**   |   |
| Securities Available-for-sale       |   |                          |   |                    |   |   |   |   |   |
| Debt Securities:                    |   |                          |   |                    |   |   |   |   |   |
| U.S. Government and federal agency  |   | $                             | (326   | )                       | $      | 17,198 |   | $ | — |   | $ | — |   |
| State and municipal                 |   | (10                           | )      | 491                     |   | — |   | — |   |
| Corporate                           |   | (13                           | )      | 2,573                   |   | (2 | ) | 498 |   |
| Total securities available-for-sale |   | $                             | (349   | )                       | $      | 20,262 |   | $ | (2 | ) | $ | 498 |   |
|                                |   |                          |   |                    |   |   |   |   |   |
| Securities Held to Maturity         |   |                          |   |                    |   |   |   |   |   |
| Mortgaged-backed                    |   | $                             | (263   | )                       | $      | 17,593 |   | $ | (15 | ) | $ | 1,894 |   |

 

Management evaluates securities for other-than-temporary impairment atleast on a quarterly basis, and more frequently when economic or marketconcerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent towhich the fair value has been less than cost, (2) the financial condition andnear-term prospects of the issuer, and (3) the intent and ability of theCompany to retain its investment in the issuer for a period of time sufficientto allow for any anticipated recovery in fair value.

 

At December 31, 2003, debt securities have an aggregatedepreciation of less that 1% from the Company’s amortized cost basis.  In the available-for-sale portfolio thirtythree securities have an unrealized loss. In only one of those securities has the unrealized loss exceeded oneyear and in

 

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that security the trend is improving. There are twenty five securities in the held-to-maturity portfolio thathave an unrealized loss.  In two ofthose securities the losses have exceeded one year. In analyzing an issuer’sfinancial condition, management considers whether the securities are issued bythe federal government or its agencies, whether downgrades by bond ratingagencies have occurred, and industry analysis’ reports.  As management has the ability to hold debtsecurities until maturity, or for the foreseeable future if classified asavailable for sale, no declines are deemed to be other than temporary.

 

**NOTE 4 – LOANS**

 

A summary of the balances of loans is as follows:

 
|                                   |   | **December 31,**       |   |
|----------------------------------------|--------|-----------------------------|--------|
|                                   |   | **2003**                    |   | **2002** |   |
|                                   |   | **(Dollars  in thousands)** |   |
|                                   |   |                        |   |   |   |
| Commercial and industrial              |   | $                           | 14,609 |   | $ | 3,076 |   |
| Real Estate:                           |   |                        |   |   |   |
| Commercial                             |   | 22,768                      |   | 9,276 |   |
| Residential                            |   | 9,160                       |   | 1,530 |   |
| Construction and land development      |   | 20,284                      |   | 10,032 |   |
| SBA/USDA loans                         |   | 11,578                      |   | — |   |
| Consumer loans                         |   | 4,272                       |   | 1,091 |   |
|                                   |   | 82,671                      |   | 25,005 |   |
|                                   |   |                        |   |   |   |
| Less:   Allowance for loan losses |   | 822                         |   | 220 |   |
| Net unearned loan fees                 |   | 224                         |   | 173 |   |
| Loans, net                             |   | $                           | 81,625 |   | $ | 24,612 |   |

 

 

An analysis of the allowance for loan losses is as follows:

 
|                                       |   | **Period  Ended December 31,** |   |
|--------------------------------------------|--------|-------------------------------------|--------|
|                                       |   | **2003**                            |   | **2002** |   | **2001** |   |
|                                       |   | **(Dollars  in thousands)**         |   |
|                                       |   |                                |   |   |   |   |   |
| Balance at beginning of year               |   | $                                   | 220    |   | $ | — |   | $ | — |   |
| Provision for loan losses                  |   | 602                                 |   | 220 |   | — |   |
| Loans charged-off                          |   | —                              |   | — |   | — |   |
| Recoveries of loans previously charged-off |   | —                              |   | — |   | — |   |
| Balance at end of year                     |   | $                                   | 822    |   | $ | 220 |   | $ | — |   |

 

The Company also carries an allowance for undisbursed loan commitmentswhich is reported as an “other liability”. At December 31, 2003 and 2002 such allowance was $75 thousand and$62 thousand, respectively.

 

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The Company had no loans which were classified as impaired as ofDecember 31, 2003.  In addition,the Company had no non-accrual loans or loans past due greater than 90 days andstill accruing interest as of December 31, 2003 and 2002.

 

**NOTE 5 – PREMISES ANDEQUIPMENT**

 

A summary of the cost and accumulated depreciation of premises andequipment is as follows:

 
|                     |   | **December 31,** |   |
|--------------------------|--------|-----------------------|--------|
|                     |   | **2003**              |   | **2002** |   |
|                     |   |                  |   |   |   |
| Premises:                |   |                  |   |   |   |
| Leasehold Improvements   |   | $                     | 969    |   | $ | 969 |   |
| Furniture and Equipment  |   | 1,549                 |   | 1,367 |   |
| Automobiles              |   | 62                    |   | 27 |   |
| Construction in Progress |   | 30                    |   | — |   |
|                     |   |                  | 2,610  |   |   | 2,363 |   |
|                     |   |                  |   |   |   |
| Accumulated depreciation |   |                  | (542   | ) |   | (189 | ) |
|                     |   | $                     | 2,069  |   | $ | 2,174 |   |

 

 

Pursuant to the terms of non-cancelable lease agreements in effect atDecember 31, 2003, pertaining to banking premises, future minimum rentcommitments (in thousands) under various operating leases are as follows:

 
| **Year Ending December 31,** |   |   |   |
|-----------------------------------|--------|--------|--------|
| 2004                              |   | $      | 326    |   |
| 2005                              |   | 472    |   |
| 2006                              |   | 508    |   |
| 2007                              |   | 515    |   |
| 2008                              |   | 523    |   |
| Thereafter                        |   | 3,970  |   |
| **Total**                         |   | $      | 6,314  |   |

 

The leases contain options to extend for periods of time of one to tenor more years.  Total rent expense forthe periods ended December 2003, 2002 and 2001, amounted to approximately$282 thousand, $191 thousand and $68 thousand, respectively.

 

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**NOTE 6 – DEPOSITS**

 

At December 31, 2003, the scheduled maturities of time deposits,including IRA accounts (in thousands) are as follows:

 
| **During the year of:** |   | **Under $100** |   | **Over $100** |   | **Total** |   |
|-------------------------|--------|----------------|--------|---------------|--------|-----------|--------|
| 2004                    |   | $              | 6,225  |          | $      | 21,840    |   | $ | 28,065 |   |
| 2005                    |   | 124            |   | 508           |   | 632       |   |
| 2006                    |   | 72             |   | 100           |   | 172       |   |
| 2007                    |   | 184            |   | 200           |   | 384       |   |
| 2008                    |   | 51             |   | —        |   | 51        |   |
| Total                   |   | $              | 6,656  |          | $      | 22,648    |   | $ | 29,304 |   |

 

At December 31, 2003 the Bank’s specialized program of tax freeexchange money market demand deposits aggregated $50 million, while atDecember 31, 2002 such amount was $25 million.

 

**NOTE 7 – OTHERBORROWED FUNDS**

 

The Company has entered into two agreements with correspondent banksunder which it can purchase federal funds up to about $3 million.  The interest charged on borrowings isdetermined by the lending institution at the time of the borrowing.  These lines of credit are unsecured.  There were no balances outstanding underthese agreements at December 31, 2003, and 2002.

 

The Company also has an agreement with the Federal Home Loan Bank ofSan Francisco (FHLB) to borrow funds. Advances are collateralized by qualifying assets pursuant to collateralagreements with FHLB.  There wereovernight advances of $3 million outstanding as of December 31, 2003.  There were no advances outstanding as ofDecember 31, 2002.

 

Other borrowed funds as of December 31, 2003 includes $3.125million in unsecured notes payable to related parties.  These notes were issued by the Company and$2.750 million of the funds was contributed to the Bank to support itsgrowth.  Of the total notes drawn, $3million have a floating rate with a floor of 6.25% and are due April 30,2004, while $125 thousand are drawn with a floating rate with a floor of 6.5%and are due June 30, 2005.

 

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**NOTE 8 – INCOME TAXES**

 

The cumulative tax effects of the primary temporary differences whichcreated deferred tax assets and liabilities at December 31, 2003 and 2002are as follows:

 
|                                                            |   | **December 31,** |   |
|-----------------------------------------------------------------|--------|-----------------------|--------|
|                                                            |   | **2003**              |   | **2002** |   |
|                                                            |   |                  |   |   |   |
| Deferred tax assets:                                            |   |                  |   |   |   |
| Net operating loss carryforwards                                |   | $                     | 922    |   | $ | 741 |   |
| Allowance for loan losses                                       |   |                  | 58     |   |   | — |   |
| Development stage costs                                         |   | 154                   |   | 207 |   |
| Other                                                           |   | 37                    |   | 9 |   |
| Total deferred tax assets                                       |   | 1,171                 |   |   | 957 |   |
|                                                            |   |                  |   |   |   |
| Deferred tax liabilities:                                       |   |                  |   |   |   |
| Allowance for loan losses                                       |   | —                |   |   | 54 |   |
| Premises and equipment resulting from  depreciation differences |   | 146                   |   | 106 |   |
| Other                                                           |   | 45                    |   | — |   |
| Total deferred tax liabilities                                  |   | 191                   |   |   | 160 |   |
|                                                            |   |                  |   |   |   |
| Net deferred tax asset                                          |   | 980                   |   | 797 |   |
| Less valuation allowance                                        |   | 980                   |   | 797 |   |
|                                                            |   | $                     | — |   | $ | — |   |

 

At December 31, 2003 and 2002, the Company had approximately$2.712 and $2.180 million respectively, of operating loss carryforwards forfederal income tax purposes that expire beginning in 2021.  At December 31, 2003 and 2002, the netdeferred tax asset available of $980 thousand and $797 thousand, respectively,was offset by an equal valuation allowance.

 

The income tax provision differs from the amount of income taxdetermined by applying the US federal income tax rate to pretax income for theyears ended December 31, 2003 and 2002 and the period from inception toDecember 31, 2001 due to the following:

 
|                                                 |   | **2003** |   |   |   | **2002** |   |   |   | **2001** |   |   |   |
|------------------------------------------------------|--------|----------|--------|--------|--------|----------|--------|--------|--------|----------|--------|--------|--------|
| Computed “expected” tax benefit            |   | $        | (198   | )      | (35    | )%       | $      | (618   | )      | 35       | %      | $      | (199   | ) | (35 | )% |
| Increase (decrease) in income taxes  resulting from: |   |     |   |   |   |     |   |   |   |     |   |   |   |
| Valuation allowance on deferred tax asset            |   | 183      |   | 32     | %      | 594      |   | 34     | %      | 203      |   | 36     | %      |
| Other                                                |   | 15       |   | 3      | %      | 24       |   | 1      | %      | (4       | )      | (1     | )%     |
|                                                 |   | $        | — |   |   |     | $      | — |   |     |   | $      | — |   |   |   |

 

**NOTE 9 – COMMITMENTSAND CONTINGENCIES**

 

***FinancialInstruments with Off-balance Sheet Risk***

 

The Company is party to financial instruments with off-balance-sheetrisk in the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsmay include commitments to extend credit, and standby letters of credit.  Such commitments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated balance sheets.

 

The Company’s exposure to credit loss, in the event of nonperformanceby the other parties to the financial instrument, is represented by thecontractual amount of these instruments. The Company follows the same credit policies in making commitments as itdoes for on-balance-sheet instruments. A summary of the contract amount of the company’s exposure tooff-balance sheet risk as of December 31, is as follows:

 

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|                                                                                |   | **Contract  Amount**        |   |
|-------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                |   | **2003**                    |   | **2002** |   |
|                                                                                |   | **(Dollars  in thousands)** |   |
|                                                                                |   |                        |   |   |   |
| Commitments to extend credit, including  unsecured commitments of $1,435 and $3,439 |   | $                           | 27,000 |   | $ | 14,305 |   |
| Unsecured consumer lines of credit                                                  |   | 679                         |   | 228 |   |
| Standby letters of credit (Unsecured)                                               |   | 197                         |   | — |   |
|                                                                                |   | $                           | 27,876 |   | $ | 14,533 |   |

 

Commitments to extend credit are agreements to lend a customer as longas there is no violation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments are expectedto expire without every being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements.  The Company evaluates each customer’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary bythe Company, is based on management’s credit evaluation of the customer.  Collateral held varies, but may includeaccounts receivable, inventory, property and equipment, residential real estateand income producing commercial properties.

 

Unfunded commitments under commercial lines-of-credit, revolving creditlines and overdraft protection agreements are commitments for possibleextension of credit to existing customers. These lines-of-credit may be uncollateralized, and may not contain aspecified maturity date and may not be drawn upon to the total extent to whichthe Company is committed.

 

Standby letters-of-credit are conditional lending commitments issued bythe Company to guarantee the performance of a customer to a third party.  Those letters-of-credit are primarily issuedto support public and private borrowing arrangements.  Essentially all letters of credit have expiration dates withinone year.  The credit risk involved inissuing letters-of-credit is essentially the same as that involved in extendingloan facilities to customers.

 

In connection with standby letters of credit, the Bank recognizes therelated commitment fee received from the third party as a liability at theinception of the guarantee pursuant to FASB Interpretation 45 (FIN 45) *Initial Recognition and Measurement of the Liabilityfor a Guarantor’s Obligations*. Commitment fees where thelikelihood of exercise of the commitment is remote, are generally recognized asservice fee income over the commitment period.

 

As of December 31, 2003 there were commitment fee obligations ofless than $1 thousand, for the $197 thousand Standby Letters of Credit. Thecredit risk involved in issuing letters of credit is essentially the same asthat involved in extending facilities to customers, and management believesthat no undue credit or service fee income exposure exists as a result of suchtransaction.

 

***Concentrations***

The Company makes commercial, commercial real estate, and residentialreal estate loans in northern Nevada and northern California.  The Company makes consumer loans tocustomers primarily in northern Nevada.  At December 31, 2003 and 2002, real estate loans accountedfor approximately 63% and 83%, respectively, of total loans.  Substantially all of these loans are securedby first liens with an initial loan to value ratio of generally not more than75%.  The Company’s policy

 

60

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for requiring collateral is to obtain collateral whenever it isavailable or desirable; depending upon the degree of risk the Company iswilling to take.  In addition,approximately 11% of total loans are unsecured.  The Company’s loans are expected to be repaid from cash flow orfrom proceeds from the sale of selected assets of the borrowers.

 

A substantial portion of the Company’s customers’ ability to honortheir contracts is dependent on the economy in the areas the Companyserves.  The Company’s goal is tomaintain a diversified loan portfolio which requires the loans to be wellcollateralized and supported by cash flows.

 

***Legal Contingencies***

In the ordinary course of business the Company may become subject tolegal proceeding and claims.  At thecurrent time, management is not aware of any unasserted claims or legalactions.

 

***Executive Agreements***

 

The Company has entered into agreement with five executives, whichstate that in the event the Company terminates the employment of these officerswithout cause, or upon change in control of the Company, the Company may beliable for the officers’ salaries as outlined in the agreements.

 

**NOTE 10 – REGULATORYCAPITAL REQUIREMENTS**

 

The Company (on a consolidated basis) and the Bank are subject tovarious regulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Company’s and Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Bankmust meet certain specific capital guidelines that involve quantitativemeasures of their assets, liabilities and certain off-balance-sheet items ascalculated under regulatory accounting practices.  The capital amounts and classifications are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.  Prompt corrective actionprovisions are not applicable to bank holding companies.

 

Quantitative measures established by regulation to ensure capitaladequacy require the Company and the Bank to maintain minimum amounts andratios (set forth in the following table) of total and Tier 1 capital (asdefined in the regulations) to risk-weighted assets (as defined) and of Tier 1capital (as defined) to average assets (as defined).  Management believes, as of December 31, 2003 and 2002, thatthe Company and Bank meet all capital adequacy requirements to which they aresubject.

 

As of December 31, 2003, the most recent notification from theFederal Deposit Insurance Company categorized the Bank as well capitalizedunder the regulatory framework for prompt correct action.  To be categorized as well capitalized, aninstitution must maintain minimum total risk-based, Tier 1 risk-based and Tier1 leverage ratios as set forth in the tables below. Additional capital has beenraised subsequent to year-end. See Note 17.

 

61

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The Company’s and the Bank’s capital amounts and ratios as ofDecember 31, 2003 and 2002 are presented in the table below:

 
|                                   |   | **Actual** |   | **Minimum  Capital  Requirement** |   | **Minimum to  be Well  Capitalized Under  Prompt Corrective  Action Provisions** |   |
|----------------------------------------|--------|------------|--------|-----------------------------------|--------|----------------------------------------------------------------------------------|--------|
|                                   |   | **Amount** |   | **Ratio**                         |   | **Amount**                                                                       |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                   |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| **December 31, 2003**             |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | 12,011     |   | 11.84                             | %      | 8,118                                                                            |   | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | 14,853     |   | 14.64                             | %      | 8,118                                                                            |   | 8.00 | % | 10,148 |   | 10.00 | % |
|                                   |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | 11,114     |   | 10.94                             | %      | 4,059                                                                            |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | 13,956     |   | 13.75                             | %      | 4,059                                                                            |   | 4.00 | % | 6,089 |   | 6.00 | % |
|                                   |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | 11,114     |   | 7.06                              | %      | 6,297                                                                            |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | 13,956     |   | 8.87                              | %      | 6,297                                                                            |   | 4.00 | % | 7,871 |   | 5.00 | % |
|                                   |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| **December 31, 2002**             |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Nevada Security Bank                   |   | 11,961     |   | 23.31                             | %      | 4,103                                                                            |   | 8.00 | % | 5,129 |   | 10.00 | % |
|                                   |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Nevada Security Bank                   |   | 11,679     |   | 22.76                             | %      | 2,052                                                                            |   | 4.00 | % | 3,078 |   | 6.00 | % |
|                                   |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |   |       |   |                              |   |                                                                             |   |   |   |   |   |   |   |
| Nevada Security Bank                   |   | 11,679     |   | 15.17                             | %      | 3,079                                                                            |   | 4.00 | % | 3,849 |   | 5.00 | % |

 

Additionally, State of Nevada bank regulations restrict distribution ofthe net assets of the Bank due to the fact that such regulations require thesum of the Bank’s stockholders’ equity and allowance for loan losses to be atleast 6% of the average of the Bank’s total daily deposit liabilities for thepreceding 60 days.  As a result of theseregulations, approximately $8.788 million and $3.968 million of the Bank’sstockholders’ equity was restricted at December 31, 2003 and 2002respectively.  In addition, as a resultof the Bank’s accumulated deficit, the Bank is restricted from payingdividends.

 

**NOTE 11 – EMPLOYEEBENEFIT PLANS**

 

The Company has a qualified 401(k) benefit plan for all eligibleemployees.  Participants are able todefer up to 15% of their compensation subject to certain limits based onfederal tax laws. The plan also provides a profit sharing component where theCompany can make discretionary

 

62

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contributions to the plan, which are allocated based on thecompensation of eligible employees.  Nocontributions were made during the periods ended December 31, 2003, 2002,and 2001.

 

**NOTE 12 – STOCKCOMPENSATION PLAN**

 

The Company has adopted the 2002 Stock Option Plan (the”Plan”) underwhich options to acquire common stock of the Company may be granted toemployees, officers, directors and other at the discretion of the Board ofDirectors.  The Plan allows for the grantingof incentive and nonqualifying stock options as those terms are defined in theInternal Revenue Code.  The Plan, asamended, authorized up to 281,186 shares of common stock be provided by sharesauthorized but not outstanding.  ThePlan provides for the exercise price and term of each option to be determinedby the Board at the date of grant, provided that no incentive options shallhave a term greater than 10 years.

 

The fair value of each option grant for pro-forma disclosure purposes(see Note 1) is estimated on the date of grant using the following assumptionspursuant to the Black Scholes method in 2003 and the minimum value approach in2002 as described in FASB Statement No. 123:

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
| Risk-free interest rate |   | 3.65     | %      | 3.4      | %      |
| Dividend yield          |   | 0        | %      | 0        | %      |
| Expected life           |   | 7 years  |   | 7 years  |   |
| Volatility              |   | 35       | %      | N/A      |   |
| Fair value per option   |   | $        | 4.51   |     | $      | 2.09 |   |
|                         |        |          |        |          |        |  |  |

 

 

A summary of stock option activity for the year ended December 31,2003 is as follows:

 
|                             |   | **December 31,** |   |
|----------------------------------|--------|-----------------------|--------|
|                             |   | **2003**              |   | **2002** |   |
|                             |   | **Shares**            |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                             |   |                  |   |   |   |   |   |   |   |
| Outstanding at beginning of year |   | 208,500               |   | $ | 10.00 |   | — |   | $ | — |   |
| Granted                          |   | 18,500                |   | 10.27 |   | 208,500 |   | 10.00 |   |
| Exercised                        |   | —                |   | — |   | — |   | — |   |
| Forfeited                        |   | —                |   | — |   | — |   | — |   |
| Outstanding at end of year       |   | 227,000               |   | $ | 10.02 |   | 208,500 |   | $ | 10.00 |   |
|                             |   |                  |   |   |   |   |   |   |   |
| Options exercisable at year-end  |   | 92,500                |   | $ | 10.01 |   | 48,900 |   | $ | 10.00 |   |
|                             |   |                  |   |   |   |   |   |   |   |
| Weighted-average remaining life  |   | 9 years               |   |   |   | 10 years |   |   |   |

 

All stock options granted under the Plan expire ten years after thedate of grant.  The options generallyvest 20% upon grant and 20% per year over four years.  There were 9,000 nonqualified options granted in 2002 that vestedimmediately.

 

63

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**NOTE 13 – RELATEDPARTY LOANS**

 

In the ordinary course of business, the Company has had, and may beexpected to have in the future, banking transactions with directors,significant stockholders, principal officers, their immediate families andaffiliated companies in which they are principal stockholders (commonlyreferred to as related parties).  Inmanagement’s opinion, these loans and transactions were on the same terms asthose for comparable loans and transactions with nonrelated parties.

 

***Loan Transactions***

 
|                                                                |   | **2003**                    |   | **2002** |   |
|---------------------------------------------------------------------|--------|-----------------------------|--------|----------|--------|
|                                                                |   | **(Dollars  in thousands)** |   |
| **Balance, Beginning**                                              |   | $                           | 348    |     | $      | — |   |
| New loans                                                           |   | 4,563                       |   | 372      |   |
| Repayments                                                          |   | 805                         |   | 24       |   |
| **Balance, Ending**                                                 |   | $                           | 4,106  |     | $      | 348 |   |
|                                                                |   |                        |   |     |   |
| Undisbursed commitments to related parties,  December 31, 2003 |   | $                           | 507    |     | $      | 342 |   |
|                                                                |   |                        |   |     |   |
| Deposit balances of related parties as of  December 31, 2003   |   | $                           | 5,530  |     | $      | 2,975 |   |

 

**NOTE 14 – FAIR VALUEOF FINANCIAL INSTRUMENTS**

 

Financial Accounting Standards Board (FASB) Statement No. 107, *DisclosuresAbout Fair Value of Financial Instruments,* requires disclosure offair value information about financial instruments, whether or not recognizedin the balance sheets, for which it is practicable to estimate that value.

 

Management uses its best judgment in estimating the fair value of theCompany’s financial instruments; however, there are inherent weaknesses in anyestimation technique.  Therefore, forsubstantially all financial instruments, the fair value estimates presentedherein are not necessarily indicative of the amounts the Company could haverealized in a sales transaction at December 31, 2003 or 2002.  The estimated fair value amounts have beenmeasured as of year end, and have not been reevaluated or updated for purposesof these financial statements subsequent to these dates.  As such, the estimated fair values of thesefinancial instruments subsequent to the reporting dates may be different thanthe amounts reported at year-end.

 

The information should not be interpreted as an estimate of the fairvalue of the entire Company since a fair value calculation is only required fora limited portion of the Company’s assets.

 

Due to the wide range of valuation techniques and the degree ofsubjectivity used in making the estimate, comparisons between the Company’sdisclosures and those of other companies or banks may not be meaningful.

 

The following methods and assumptions were used by the Company inestimating fair value disclosures for financial instruments.

 

64

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***Cash and cashequivalents***

The carrying amounts of cash, due from banks, and federal funds soldapproximate fair value.

 

***Securities held tomaturity and available for sale***

Fair values for securities, are based on quoted market prices, whereavailable.  If quoted market prices arenot available, fair values are based on quoted market prices of comparableinstruments.

 

***Other equitysecurities***

The reported amount of Federal Home Loan Bank (FHLB) Stock equals itsfair value because the shares can only be redeemed by the FHLB at the $100 pershare value.  No ready market exists forthe Pacific Coast Banker Bancorp and it has no quoted market value.

 

***Loans***

For variable-rate loans that reprice frequently and with no significantchange in credit risk, fair values are based on carrying values.  The fair values for all other loans areestimated using discounted cash flow analyses, using interest rates currentlybeing offered for loans with similar terms to borrowers with similar creditquality.

 

***Deposit liabilities***

The fair values disclosed for deposits with no defined maturities areequal to their carrying amounts which represent the amount payable ondemand.  The carrying amounts forvariable-rate, fixed-term money market accounts and certificates of depositapproximate their fair value at the reporting date.  Fair values for fixed-rate certificates of deposit are estimatedusing a discounted cash flow calculation that applies interest rates currentlybeing offered on certificates to a schedule of aggregated expected monthlymaturities on time deposits.

 

***Other borrowed funds***

The carrying amounts of FHLB advances approximate fair value due to thenext day maturity.  The carrying valueof related party notes payable approximate fair value because of their variableinterest rate.

 

***Accrued interestreceivable and payable***

The carrying amounts of accrued interest receivable and payableapproximate fair value.

 

***Off-balance sheetinstruments***

Fair values for the Company’s off-balance sheet lending commitments(commitments to extend credit) are based on fees currently charged to enterinto similar agreements, taking into account the remaining terms of theagreements and the counterparties’ credit standing. As of December 31,2003 and 2002, loan commitments on which the committed fixed interest rate isless than the current market rate are insignificant.

 

65

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The estimated fair values, and related carrying amounts, of theCompany’s financial instruments are as follows:

 
|                          |   | **December 31,** |   |
|-------------------------------|--------|-----------------------|--------|
|                          |   | **2003**              |   | **2002** |   |
|                          |   | **Carrying  Amount**  |   | **Fair  Value** |   | **Carrying  Amount** |   | **Fair  Value** |   |
|                          |   | **(in  thousands)**   |   |
| Financial Assets:             |   |                  |   |   |   |   |   |   |   |
| Cash and due from banks       |   | $                     | 3,305  |   | $ | 3,305 |   | $ | 2,129 |   | $ | 2,129 |   |
| Federal funds sold            |   | 2,655                 |   | 2,655 |   | 2,005 |   | 2,005 |   |
| Securities available-for-sale |   | 36,913                |   | 36,913 |   | 13,393 |   | 13,393 |   |
| Securities held-to-maturity   |   | 37,850                |   | 37,938 |   | 34,599 |   | 34,972 |   |
| Other equity securities       |   | 427                   |   | 427 |   | 51 |   | 51 |   |
| Loans, net                    |   | 81,625                |   | 82,309 |   | 24,612 |   | 24,884 |   |
| Accrued interest receivable   |   | 1,072                 |   | 1,072 |   | 613 |   | 613 |   |
|                          |   |                  |   |   |   |   |   |   |   |
| Financial Liabilities:        |   |                  |   |   |   |   |   |   |   |
| Deposits                      |   | 148,747               |   | 148,866 |   | 67,270 |   | 67,392 |   |
| Other borrowed funds          |   | 6,125                 |   | 6,125 |   | — |   | — |   |
| Accrued interest payable      |   | 24                    |   | 24 |   | 29 |   | 29 |   |
| Capital lease obligation      |   | —                |   | — |   | 15 |   | 15 |   |
|                               |        |                       |        |  |  |  |  |  |  |  |  |  |  |

 

 

**NOTE 15 – CONDENSEDFINANCIAL STATEMENTS OF PARENT COMPANY**

 

Financial information pertaining only to The Bank Holdings is asfollows:

 
|                                            |   | **December 31,  2003** |   |
|-------------------------------------------------|--------|-----------------------------|--------|
|                                            |   | **(in  thousands)**         |   |
| **Balance sheets**                              |   |                        |   |
|                                            |   |                        |   |
| **Assets**                                      |   |                        |   |
| Cash and due from banks                         |   | $                           | 165    |   |
| Investment in Nevada Security Bank              |   | 13,695                      |   |
| Other assets                                    |   | 118                         |   |
| Total Assets                                    |   | $                           | 13,978 |   |
|                                            |   |                        |   |
| **Liabilities and Stockholders’ Equity**   |   |                        |   |
| Accrued expenses                                |   | $                           | — |   |
| Other borrowed funds                            |   | 3,125                       |   |
| Total Liabilities                               |   | 3,125                       |   |
|                                            |   |                        |   |
| **Stockholders’ Equity**                   |   | 10,853                      |   |
|                                            |   |                        |   |
| Total Liabilities and Stockholder’s Equity |   | $                           | 13,978 |   |

 

66

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|                                                      |   | **Year Ended  December 31, 2003 (1)** |   |
|-----------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                      |   | **(in  thousands)**                        |   |
| **Statement of Operations**                               |   |                                       |   |
| Income                                                    |   | $                                          | — |   |
| Operating expenses                                        |   | (92                                        | )      |
| Net Loss before adjustments                               |   | (92                                        | )      |
|                                                      |   |                                       |   |
| Equity in undistributed net loss of Nevada  Security Bank |   | (473                                       | )      |
|                                                      |   |                                       |   |
| **Net Loss**                                              |   | $                                          | (565   | ) |

 

----

(1) The Company was incorporated and madeeffective during 2003.

 
|                                                     |   | **Year Ended  December 31, 2003 (1)** |   |
|----------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                     |   | **(in  thousands)**                        |   |
| **Statement of Cash Flows**                              |   |                                       |   |
|                                                     |   |                                       |   |
| **Cash flows from operating activities:**                |   |                                       |   |
| Net loss                                                 |   | $                                          | (565   | ) |
| Equity in net loss of Nevada State Bank                  |   | 473                                        |   |
| Net cash used in operating activities                    |   | (92                                        | )      |
|                                                     |   |                                       |   |
| **Cash Flows from Investing Activities**                 |   |                                       |   |
| Investment in subsidiary                                 |   | (2,750                                     | )      |
| Net cash used in investing activities                    |   | (2,750                                     | )      |
|                                                     |   |                                       |   |
| **Cash Flows from Financings Activities:**               |   |                                       |   |
| Proceeds from borrowed funds                             |   | 3,125                                      |   |
| Stock issuance costs capitalized pending  stock issuance |   | (118                                       | )      |
| Net cash provided by financing activities                |   | 3,007                                      |   |
|                                                     |   |                                       |   |
| Increase in cash and cash equivalents                    |   |                                       | 165    |   |
|                                                     |   |                                       |   |
| **Cash and Cash Equivalents**                            |   |                                       |   |
| Beginning of Period                                      |   |                                       | — |   |
| End of Period                                            |   | $                                          | 165    |   |

 

----

(1) The Company was incorporated and madeeffective during 2003.

 

67

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**NOTE 16 – QUARTERLYDATA (UNAUDITED)**

 

Information for Years Ended December 31, are as follows:

 
|                                                                                        |   | **2003**                                           |   | **2002**           |   |
|---------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|--------------------|--------|
|                                                                                        |   | **Fourth  Quarter**                                |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   | **Fourth  Quarter** |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
|                                                                                        |   | **(Dollars  in thousands, except per share data)** |   |
|                                                                                        |   |                                               |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                                             |   | $                                                  | 1,735  |               | $      | 1,396 |   | $ | 1,143 |   | $ | 976 |   | $ | 902 |   | $ | 619 |   | $ | 333 |   | $ | 94 |   |
| Interest Expense                                                                            |   | 597                                                |   | 534                |   | 413 |   | 349 |   | 391 |   | 239 |   | 114 |   | 15 |   |
| Net interest income                                                                         |   | 1,138                                              |   | 862                |   | 730 |   | 627 |   | 511 |   | 380 |   | 219 |   | 79 |   |
|                                                                                        |   |                                               |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for Loan Losses                                                                   |   | 55                                                 |   | 95                 |   | 362 |   | 90 |   | 50 |   | 95 |   | 64 |   | 11 |   |
| Net interest income after Provision for  Loan Losses                                        |   | 1,083                                              |   | 767                |   | 368 |   | 537 |   | 461 |   | 285 |   | 155 |   | 68 |   |
|                                                                                        |   |                                               |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest income                                                                         |   | 194                                                |   | 127                |   | 243 |   | 329 |   | 39 |   | 23 |   | 14 |   | 1 |   |
| Non-interest expenses                                                                       |   | 1,187                                              |   | 1,110              |   | 993 |   | 923 |   | 741 |   | 739 |   | 784 |   | 547 |   |
|                                                                                        |   |                                               |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                           |   | $                                                  | 90     |               | $      | (216 | ) | $ | (382 | ) | $ | (57 | ) | $ | (241 | ) | $ | (431 | ) | $ | (615 | ) | $ | (478 | ) |
| Other comprehensive income(loss), unrealized  gains/losses on securities available-for-sale |   | 68                                                 |   | (352               | )      | 113 |   | (406 | ) | 211 |   | 117 |   | (12 | ) | — |   |
|                                                                                        |   |                                               |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive Income (Loss)                                                                 |   | $                                                  | 158    |               | $      | (568 | ) | $ | (269 | ) | $ | (463 | ) | $ | (30 | ) | $ | (314 | ) | $ | (627 | ) | $ | (478 | ) |
|                                                                                        |   |                                               |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                                                           |   |                                               |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                       |   | $                                                  | .06    |               | $      | (.16 | ) | $ | (.27 | ) | $ | (.04 | ) | $ | (.17 | ) | $ | (.31 | ) | $ | (.44 | ) | $ | (.34 | ) |
| Diluted                                                                                     |   | $                                                  | .06    |               | $      | (.16 | ) | $ | (.27 | ) | $ | (.04 | ) | $ | (.17 | ) | $ | (.31 | ) | $ | (.44 | ) | $ | (.34 | ) |

 

**NOTE 17 – SUBSEQUENTEVENTS**

 

As of March 22, 2004 the Company completed a secondary stockoffering during which an additional 1,552,500 shares were issued with total netproceeds of approximately $16.3 million. Approximately $4.125 million will be used to payoff debt, about $7million will be used to support Nevada Security Bank’s anticipated growth andthe remaining proceeds will be used to support the Company’s future activities.

 

68

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**ITEM 8****.****                                                    ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE**

 

None

 

**ITEM 8A****.****                                           ****CONTROLS AND PROCEDURES**

 

(a)  Evaluation of Disclosure Controls andProcedures

 

TheCompany’s Chief Executive Officer and its Chief Financial Officer, afterevaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of theend of the period covered by this report have concluded that the Company’sdisclosure controls and procedures were adequate and effective to ensure that materialinformation relating to the Company and its consolidated subsidiary would bemade known to them by others within those entities, particularly during theperiod in which this annual report was being prepared.

 

Toassure that financial information is reliable and assets are safeguarded,management maintains an effective system of internal controls and procedures,important elements of which include: careful selection, training and development of operating and financialmanagers; an organization that provides appropriate division of responsibility;and communications aimed at assuring that Company policies and procedures areunderstood throughout the organization. In establishing internal controls, management weighs the costs of suchsystems against the benefits it believes such systems will provide.

 

Itshould be noted that in designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  The Companyhas designed its disclosure controls and procedures to reach a level ofreasonable assurance of achieving desired control objectives and, based on theevaluation described above, the Company’s Chief Executive Officer and ChiefFinancial Officer (Principal Accounting Officer) concluded that the Company’sdisclosure controls and procedures were effective at reaching that level ofreasonable assurance.

 

Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

 

Changesin Internal Controls

 

Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s internal controlssubsequent to the end of the period covered by this report.

 

69

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**PART III**

 

**ITEM 9****                                                       ****DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

 

**ITEM 10****.****                                             ****EXECUTIVE COMPENSATION**

 

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

 

**ITEM 11****.****                                            ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Theinformation in response to Item 201(d) of Regulation S-B can be found in Item 5hereof and is incorporated herein by this reference.  The remaining information required by this item can be found inthe Company’s Definitive Proxy Statement pursuant to Regulation 14A under theSecurities Exchange Act of 1934 and by this reference are incorporated herein.

 

**ITEM 12****.****                                             ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Theinformation required by this item can be found in the Company’s DefinitiveProxy Statement pursuant to Regulation 14A under the Securities Exchange Act of1934 and by this reference are incorporated herein.

 

**ITEM 13****.****                                             ****EXHIBITS, AND REPORTS ON FORM 8-K**

 

(a)  Exhibits

 

Thefollowing documents are included or incorporated by reference in this AnnualReport on Form 10-KSB:

 
| **Exhibit No.** |   | **Description**                                                  |
|-----------------|--------|------------------------------------------------------------------|
|            |   |                                                             |
| 3.1             |   | Articles  of Incorporation of The Bank Holdings (1)              |
|            |   |                                                             |
| 3.2             |   | Amendment  to Articles of Incorporation of The Bank Holdings (1) |
|            |   |                                                             |
| 3.3             |   | By-laws  of The Bank Holdings (1)                                |
|            |   |                                                             |
| 4.1             |   | Share  Certificate (3)                                           |
|            |   |                                                             |
| 4.2             |   | Warrant  Certificate (3)                                         |
|            |   |                                                             |
| 10              |   | Material  Contracts                                              |
|            |   |                                                             |
| 10.1            |   | 2002  Stock Option Plan (2)                                      |
|            |   |                                                             |
| 10.2            |   | Employment  Agreement of Harold G. Giomi (2)                     |
|            |   |                                                             |
| 10.3            |   | Non-qualified  Stock Option Agreement of Harold G. Giomi (2)     |

 

70

----

 
| 10.4   |   | Employment  Agreement of David A. Funk (2)                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                         |
| 10.5   |   | Non-qualified  Stock Option Agreement of David A. Funk (2)                                                                                   |
|   |   |                                                                                                                                         |
| 10.6   |   | Employment  Agreement of Joe P. Bourdeau (2)                                                                                                 |
|   |   |                                                                                                                                         |
| 10.7   |   | Non-qualified  Stock Option Agreement of Joe P. Bourdeau (2)                                                                                 |
|   |   |                                                                                                                                         |
| 10.8   |   | Employment  Agreement of Jack B. Buchold (2)                                                                                                 |
|   |   |                                                                                                                                         |
| 10.9   |   | Non-qualified  Stock Option Agreement of Jack B. Buchold (2)                                                                                 |
|   |   |                                                                                                                                         |
| 10.10  |   | Employment  Agreement of Robert J. Walter (2)                                                                                                |
|   |   |                                                                                                                                         |
| 10.11  |   | Non-qualified  Stock Option Agreement of Robert J. Walter (2)                                                                                |
|   |   |                                                                                                                                         |
| 10.12  |   | Non-qualified  Stock Option Agreement of Edward Allison (2)                                                                                  |
|   |   |                                                                                                                                         |
| 10.13  |   | Non-qualified  Stock Option Agreement of Robert Barone (2)                                                                                   |
|   |   |                                                                                                                                         |
| 10.14  |   | Non-qualified  Stock Option Agreement of Keith Capurro (2)                                                                                   |
|   |   |                                                                                                                                         |
| 10.15  |   | Non-qualified  Stock Option Agreement of Jan Clark (2)                                                                                       |
|   |   |                                                                                                                                         |
| 10.16  |   | Non-qualified  Stock Option Agreement of Jan Clark (2)                                                                                       |
|   |   |                                                                                                                                         |
| 10.17  |   | Non-qualified  Stock Option Agreement of Edward Coppin (2)                                                                                   |
|   |   |                                                                                                                                         |
| 10.18  |   | Non-qualified  Stock Option Agreement of Leonard Detrick (2)                                                                                 |
|   |   |                                                                                                                                         |
| 10.19  |   | Non-qualified  Stock Option Agreement of Jesse Haw (2)                                                                                       |
|   |   |                                                                                                                                         |
| 10.20  |   | Non-qualified  Stock Option Agreement of Jim Mancuso (2)                                                                                     |
|   |   |                                                                                                                                         |
| 10.21  |   | Lease  Agreement for Incline Village Office (2)                                                                                              |
|   |   |                                                                                                                                         |
| 10.22  |   | Lease  Agreement for Reno Office (2)                                                                                                         |
|   |   |                                                                                                                                         |
| 10.23  |   | Lease  Agreement for Rancho Cordova Loan Production Office (2)                                                                               |
|   |   |                                                                                                                                         |
| 10.24  |   | Lease  Agreement for approved but unopened Robb and Mae Ann Office (2)                                                                       |
|   |   |                                                                                                                                         |
| 10.25  |   | Deferred  Compensation Plan (2)                                                                                                              |
|   |   |                                                                                                                                         |
| 11     |   | Statement  of Computation of Per Share Earnings (4)                                                                                          |
|   |   |                                                                                                                                         |
| 14     |   | Code  of Ethics (5)                                                                                                                          |
|   |   |                                                                                                                                         |
| 21     |   | Registrant’s  sole subsidiary is Nevada Security Bank, a Nevada corporation, which also  does business under the name Silverado Funding |

 

71

----

 
| 31.1   |   | Section 302  Certification by Hal Giomi (5)    |
|--------|--------|-----------------------------------------------------|
|   |   |                                                |
| 31.2   |   | Section 302  Certification by Jack Buchold (5) |
|   |   |                                                |
| 32.1   |   | Section 706  Certification by Hal Giomi (5)    |
|   |   |                                                |
| 32.2   |   | Section 706  Certification by Jack Buchold (5) |

 

----

(1)                                  This exhibit was previously files as part of,and is hereby incorporated by reference to, our registration Statement on FormS-4 filed with the Commission on May 21, 2003.

 

(2)                                  This exhibit was previously filed as part of,and is herby incorporated by reference to, our Form 10Q-SB, filed with theCommission on November 14, 2003

 

(3)                                  This exhibit was previously filed as part of,and is hereby incorporated by reference to our Form SB-2 filed with theCommission on December 17, 2003.

 

(4)                                  Computation of earnings per share isincorporated herein by reference to Note 12 of the Financial Statements.

 

(5)                                  Filed herewith.

 

(b)  Reports on Form 8-K

 

Tworeports on Form 8-K were filed during the last quarter of the Company’s fiscalyear ended December 31, 2003.

 

(1)                                  October 17, 2003 - press releaseconcerning the status of its new branch in northwest Reno, Nevada.

 

(2)                                  November 10, 2003 - letter toshareholders regarding a future common stock offering.

 

**ITEM 14****.****                                             ****PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

**Pre-Approval Policy for Services ofIndependent Auditors**

 

Aspart of its duties, the Audit Committee is required to pre-approve audit andnon-audit services performed by the independent auditors in order to assurethat the provision of such services does not impair the auditors’independence.  On an annual basis, theAudit Committee will review and provide pre-approval for certain types ofservices that may be provided by the independent auditors without obtainingspecific pre-approval from the Audit Committee.  If a type of service to be provided by the independent auditorshas not received pre-approval during this annual process, it will requirespecific pre-approval by the Audit Committee. The Audit Committee does not delegate to management its responsibilitiesto pre-approve services performed by the independent auditors.

 

72

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**Audit Fees**

 

Feesfor services for fiscal years 2003 and 2002 related to the annual financialstatement audits and reviews of quarterly financial statements, filed in thereports on Form 10-Q and statutory audits approximated $170,000 and $48,000,respectively.  Of the audit fees for2003, approximately $76,000 represents fees associated with the secondaryoffering circular as filed on Form SB2. The following table presents fees for professional audit servicesrendered by McGladrey & Pullen, LLP for the audit of The Bank Holdingsannual financial statements for the years ended December 31, 2003 and2002, and fees billed for other services rendered by McGladrey & Pullen,LLP and RSM McGladrey, Inc. (an affiliate of McGladrey & Pullen, LLP).

 

**PrincipalAccountant Fees and Services**

 
|                 |   | **For the  Years Ended  December 31,** |   |
|----------------------|--------|---------------------------------------------|--------|
|                 |   | **2003**                                    |   | **2002** |   |
|                 |   | **(in  thousands)**                         |   |
|                 |   |                                        |   |
| Audit Fees           |   | $                                           | 163    |   | $ | 44 |   |
| Tax Preparation Fees |   | $                                           | 7      |   | $ | 4 |   |
| Audit Related Fees   |   | $                                           | — |   | $ | — |   |
| All Other Fees       |   | $                                           | — |   | $ | — |   |

 

----

(1)                                  Auditfees consist of fees for professional services rendered for the audit of TheBank Holdings financial statements for 2003 and Nevada Security Bank financialstatements for 2002.  In addition, thesefees in 2003 include professional services relating to review of quarterlyfinancial statements, review of quarterly reports and regulatory filingsincluding the Registration Statement on Form S-4 and Registration Statement onForm SB-2.  The 2003 fees also includeprofessional services associated with the stock offering including issuingrelated consents and comfort letters to the underwriter.

 

(2)                                  Taxservices consist of fees related to tax return preparation services.  In addition, 2003 fees include work relatedto tax consulting services associated with the formation of the holding companyand related reorganization.

 

73

----

 

**FINANCIAL TABLES**

 

**Table 1 - Two-Year Average Balance Sheets**

 

The following table sets forth, for the periods indicated, informationregarding (i) the total dollar amount of interest income on interest-earningassets and the resultant average yields; (ii) the total dollar amount ofinterest expense on interest-bearing liabilities and the resultant averagecost; (iii) net interest income; (iv) interest rate spread; and (v) netinterest margin.  Information is basedon average daily balances during the indicated periods.

 

Table 1 - Two Year Average Balance Sheets

 
|                                                 |   | **For the  Year Ended December 31,** |    |
|------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                 |   | **2003(a,b)**                             |    | **2002(a,b)** |   |
|                                                 |   | **Average  Balance**                      |    | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
|                                                 |   | **(dollars  in thousands)**               |    |
| **Assets**                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits    |   | $                                         | 4,969   |   | $ | 68 |   | 1.37 | % | $ | 11,212 |   | $ | 159 |   | 1.41 | % |
| Securities                                           |   | 59,998                                    |    | 1,944 |   | 3.24 | % | 25,333 |   | 1,187 |   | 4.69 | % |
| Equity                                               |   | 243                                       |    | 5 |   | 2.06 | % | 35 |   | 1 |   | 2.86 | % |
| Total Investments                                    |   | 65,210                                    |    | 2,017 |   | 3.09 | % | 36,580 |   | 1,347 |   | 3.68 | % |
|                                                 |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Loans: (c)                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Commercial                                           |   | 8,280                                     |    | 376 |   | 4.54 | % | 1,406 |   | 79 |   | 5.62 | % |
| Real Estate                                          |   | 38,174                                    |    | 2,541 |   | 6.66 | % | 6,509 |   | 491 |   | 7.54 | % |
| Consumer                                             |   | 1,157                                     |    | 75 |   | 6.46 | % | 388 |   | 30 |   | 7.73 | % |
| Security Lines                                       |   | 2,575                                     |    | 241 |   | 9.36 | % | 8 |   | 1 |   | 12.50 | % |
| Other                                                |   | 28                                        |    | — |   | 0.00 | % | 7 |   | — |   | 0.00 | % |
| Total Loans                                          |   | 50,214                                    |    | 3,233 |   | 6.44 | % | 8,318 |   | 601 |   | 7.23 | % |
| Total Earning Assets (d)                             |   | 115,424                                   |    | 5,250 |   | 4.55 | % | 44,898 |   | 1,948 |   | 4.34 | % |
| Non-Earning Assets                                   |   | 5,593                                     |    |   |   |   |   | 2,005 |   |   |   |   |   |
| **Total Assets**                                     |   | $                                         | 121,017 |   |   |   |   |   | $ | 46,903 |   |   |   |   |   |
|                                                 |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and  Shareholders’ Equity**       |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| NOW                                                  |   | $                                         | 5,844   |   | $ | 15 |   | 0.26 | % | $ | 2,608 |   | $ | 7 |   | 0.27 | % |
| Savings Accounts                                     |   | 1,230                                     |    | 8 |   | 0.68 | % | 310 |   | 3 |   | 0.97 | % |
| Money Market                                         |   | 61,629                                    |    | 1,248 |   | 2.02 | % | 20,447 |   | 548 |   | 2.68 | % |
| IRA’s                                           |   | 564                                       |    | 12 |   | 2.13 | % | 147 |   | 4 |   | 2.72 | % |
| Certificates of Deposit<$100,000                  |   | 5,407                                     |    | 128 |   | 2.36 | % | 1,728 |   | 57 |   | 3.30 | % |
| Certificates of Deposit>$100,000                  |   | 18,182                                    |    | 431 |   | 2.37 | % | 4,072 |   | 137 |   | 3.36 | % |
| Total Interest Bearing Deposits                      |   | 92,856                                    |    | 1,842 |   | 1.98 | % | 29,312 |   | 756 |   | 2.58 | % |
| Borrowed Funds:                                      |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Other Borrowings                                     |   | 1,198                                     |    | 51 |   | 4.26 | % | 19 |   | 3 |   | 15.79 | % |
| Total Borrowed Funds                                 |   | 1,198                                     |    | 51 |   | 4.26 | % | 19 |   | 3 |   | 15.79 | % |
| Total Interest Bearing Liabilities                   |   | 94,054                                    |    | 1,893 |   | 2.01 | % | 29,331 |   | 759 |   | 2.59 | % |
| Demand Deposits                                      |   | 15,307                                    |    |   |   |   |   | 4,897 |   |   |   |   |   |
| Other Liabilities                                    |   | 468                                       |    |   |   |   |   | 102 |   |   |   |   |   |
| Shareholders’ Equity                            |   | 11,188                                    |    |   |   |   |   | 12,573 |   |   |   |   |   |
| **Total Liabilities  and Shareholders’ Equity** |   | $                                         | 121,017 |   |   |   |   |   | $ | 46,903 |   |   |   |   |   |
|                                                 |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| **Interest Rate  Spread (d)**                        |   |                                      |    |   |   | 2.54 | % |   |   |   |   | 1.75 | % |
|                                                 |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                       |   |                                      |    |   |   | 4.55 | % |   |   |   |   | 4.34 | % |
| Interest Expense/Earning Assets                      |   |                                      |    |   |   | 1.64 | % |   |   |   |   | 1.69 | % |
| **Net Interest Income  and Margin (f)**              |   |                                      |    | $ |  3,357 |   | 2.91 | % |   |   | $ | 1,189 |   | 2.65 | % |
|                                                      |        |                                           |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a)               Average balances are obtained from the bestavailable daily or monthly data.

(b)              Yields are reflected on a tax equivalentbasis since there are no material exempt investments.

(c)               Loans are gross of the allowance forpossible loan losses, deferred fees and related direct costs.

(d)              Represents the difference between theyield on interest-earning assets and the cost of interest-bearing liabilities.

(e)               There are no non-accrual loans duringthe periods ended December 31, 2003, or 2002.

(f)                 Net interest margin represents netinterest income as a percentage of average interest-earning assets.

 

74

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**Table 2 - Changes in Net Interest Income**

 

The following table presents certain information regarding changes inour interest income and interest expense for the periods indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided with respect tochanges attributable to (i) changes in rate (change in rate multiplied by prioryear volume), (ii) changes in volume (change in volume multiplied by prior yearrate) and (iii) changes in rate/volume (Change in rate multiplied by change involume).

 
|                                              |   | **Year Ended  December 31, 2003 vs. 2002  Increase (Decrease) Due to** |   |
|---------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
|                                              |   | **Volume**                                                                  |   | **Rate** |   | **Rate and  Volume (1)** |   | **Total  Change** |   |
|                                              |   | **(in  thousands)**                                                         |   |
| **Interest Income**                               |   |                                                                        |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits |   | $                                                                           | (89    | ) | $ | (6 | ) | $ | 4 |   | $ | (91 | ) |
| Securities                                        |   | 1,626                                                                       |   | (367 | ) | (502 | ) | 757 |   |
| Equity                                            |   | 6                                                                           |   | — |   | (2 | ) | 4 |   |
| Total Investment Interest                         |   | 1,543                                                                       |   | (373 | ) | (500 | ) | 670 |   |
|                                              |   |                                                                        |   |   |   |   |   |   |   |
| Loans                                             |   |                                                                        |   |   |   |   |   |   |   |
| Commercial                                        |   | 386                                                                         |   | (15 | ) | (74 | ) | 297 |   |
| Real Estate                                       |   | 2,388                                                                       |   | (57 | ) | (281 | ) | 2,050 |   |
| Consumer                                          |   | 59                                                                          |   | (5 | ) | (9 | ) | 45 |   |
| Security Lines                                    |   | 321                                                                         |   | — |   | (81 | ) | 240 |   |
| Other                                             |   | —                                                                      |   | — |   | — |   | — |   |
| Total Loan Interest                               |   | 3,154                                                                       |   | (77 | ) | (445 | ) | 2,632 |   |
| Total interest income                             |   | 4,697                                                                       |   | (450 | ) | (945 | ) | 3,302 |   |
|                                              |   |                                                                        |   |   |   |   |   |   |   |
| **Interest Expense**                              |   |                                                                        |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                        |   |                                                                        |   |   |   |   |   |   |   |
| NOW                                               |   | 9                                                                           |   | — |   | (1 | ) | 8 |   |
| Savings Accounts                                  |   | 9                                                                           |   | (1 | ) | (3 | ) | 5 |   |
| Money Market                                      |   | 1,104                                                                       |   | (135 | ) | (269 | ) | 700 |   |
| IRA’s                                        |   | 11                                                                          |   | (1 | ) | (2 | ) | 8 |   |
| Certificates of deposit<$100,000               |   | 121                                                                         |   | (16 | ) | (34 | ) | 71 |   |
| Certificates of deposit>$100,000               |   | 474                                                                         |   | (40 | ) | (140 | ) | 294 |   |
| Total interest-bearing deposits                   |   | 1,728                                                                       |   | (193 | ) | (449 | ) | 1,086 |   |
|                                              |   |                                                                        |   |   |   |   |   |   |   |
| Borrowed Funds                                    |   | 186                                                                         |   | (2 | ) | (136 | ) | 48 |   |
|                                              |   |                                                                        |   |   |   |   |   |   |   |
| Total interest expense                            |   | 1,914                                                                       |   | (195 | ) | (585 | ) | 1,134 |   |
|                                              |   |                                                                        |   |   |   |   |   |   |   |
| **Net Interest Income**                           |   | $                                                                           | 2,783  |   | $ | (255 | ) | $ | (360 | ) | $ | 2,168 |   |

 

----

(1)Includes changes in interest income and expense not due sole to volume or ratechanges.

 

75

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**Table 3 - Non-Interest Income and Non-Interest Expense**

 

The following table sets forth the various components of the Company’snon-interest income and expense for the periods indicated.

 
|                                                       |   | **For the  Year Ended December 31,** |   |
|------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                       |   | **2003**                                  |   | **% of Total** |   | **2002** |   | **% of Total** |   |
|                                                       |   | **(in  thousands)**                       |   |
| **Other Operating  Income**                                |   |                                      |   |   |   |   |   |   |   |
|                                                       |   |                                      |   |   |   |   |   |   |   |
| Service charges on deposit accounts                        |   | $                                         | 75     |   | 8.40 | % | $ | 24 |   | 31.17 | % |
| Other service charges, commissions and fees                |   | 97                                        |   | 10.86 | % | 44 |   | 57.14 | % |
| Pre-underwriting fees                                      |   | 224                                       |   | 25.08 | % | — |   | 0.00 | % |
| Net gain on sale of available for sale  securities         |   | 497                                       |   | 55.66 | % | 9 |   | 11.69 | % |
| Total non-interest income                                  |   | 893                                       |   | 100.00 | % | 77 |   | 100.00 | % |
|                                                       |   |                                      |   |   |   |   |   |   |   |
| As a percent of average earning assets                     |   |                                      |   | 0.77 | % |   |   | 0.17 | % |
|                                                       |   |                                      |   |   |   |   |   |   |   |
| **Other Operating  Expense:**                              |   |                                      |   |   |   |   |   |   |   |
|                                                       |   |                                      |   |   |   |   |   |   |   |
| Salaries and employee benefits                             |   | 2,024                                     |   | 48.03 | % | 1,276 |   | 45.38 | % |
| Occupancy costs                                            |   | 896                                       |   | 21.27 | % | 564 |   | 20.06 | % |
| Advertising and marketing costs                            |   | 131                                       |   | 3.11 | % | 105 |   | 3.74 | % |
| Data processing costs                                      |   | 200                                       |   | 4.75 | % | 102 |   | 3.63 | % |
| Deposit services costs                                     |   | 152                                       |   | 3.61 | % | 97 |   | 3.45 | % |
| Loan servicing costs                                       |   | 48                                        |   | 1.14 | % | — |   | 0.00 | % |
| Provision for undisbursed loan commitments                 |   | 13                                        |   | 0.31 | % | 62 |   | 2.21 | % |
| Telephone and data communications                          |   | 114                                       |   | 2.71 | % | 72 |   | 2.56 | % |
| Postage                                                    |   | 30                                        |   | 0.71 | % | 9 |   | 0.32 | % |
| Legal and accounting                                       |   | 163                                       |   | 3.87 | % | 161 |   | 5.73 | % |
| Other professional services                                |   | 139                                       |   | 3.30 | % | 98 |   | 3.49 | % |
| Stationery and supplies                                    |   | 93                                        |   | 2.21 | % | 108 |   | 3.84 | % |
| Other                                                      |   | 210                                       |   | 4.98 | % | 157 |   | 5.59 | % |
| Total non-interest expense                                 |   | $                                         | 4,213  |   | 100.00 | % | $ | 2,811 |   | 100.00 | % |
|                                                       |   |                                      |   |   |   |   |   |   |   |
| As a percentage of average earning assets                  |   |                                      |   | 3.65 | % |   |   | 6.26 | % |
| Net non-interest income as a percentage of  earning assets |   |                                      |   | 2.88 | % |   |   | 6.09 | % |
|                                                       |   |                                      |   |   |   |   |   |   |   |
| Efficiency ratio                                           |   |                                      |   | 112.26 | % |   |   | 223.63 | % |
|                                                            |        |                                           |        |  |  |  |  |  |  |  |  |  |

 

76

----

 

**Table 4 - Composition of Loan Portfolio**

 

The following table sets forth the composition of our loan portfolio atthe dates indicated.

 
|                              |   | **For the  Year Ended December 31,** |   |
|-----------------------------------|--------|-------------------------------------------|--------|
|                              |   | **2003**                                  |   | **2002** |   |
|                              |   |                                      |   | **% of** |   |   |   | **% of** |   |
|                              |   | **Amount**                                |   | **Loans** |   | **Amount** |   | **Loans** |   |
|                              |   | **(Dollars  in thousands)**               |   |
|                              |   |                                      |   |   |   |   |   |   |   |
| Commercial and Industrial         |   | $                                         | 14,609 |   | 17.67 | % | $ | 3,076 |   | 12.30 | % |
| Real Estate:                      |   |                                      |   |   |   |   |   |   |   |
| Commercial                        |   | 22,768                                    |   | 27.54 | % | 9,276 |   | 37.10 | % |
| Residential                       |   | 9,160                                     |   | 11.08 | % | 1,530 |   | 6.12 | % |
| Construction and Land Development |   | 20,284                                    |   | 24.54 | % | 10,032 |   | 40.12 | % |
| Total Real Estate                 |   | 52,212                                    |   | 63.16 | % | 20,838 |   | 83.34 | % |
|                              |   |                                      |   |   |   |   |   |   |   |
| SBA / USDA Loans                  |   | 11,578                                    |   | 14.00 | % | — |   | 0.00 | % |
| Consumer loans                    |   | 4,272                                     |   | 5.17 | % | 1,091 |   | 4.36 | % |
| Total Loans                       |   | 82,671                                    |   | 100.00 | % | 25,005 |   | 100.00 | % |
|                              |   |                                      |   |   |   |   |   |   |   |
| Less:                             |   |                                      |   |   |   |   |   |   |   |
| Allowance for loan losses         |   | 822                                       |   |   |   | 220 |   |   |   |
| Net Unearned Loan Fees            |   | 224                                       |   |   |   | 173 |   |   |   |
|                              |   | $                                         | 81,625 |   |   |   | $ | 24,612 |   |   |   |

 

77

----

 

**Table 5 - Scheduled Contractual Maturities of the LoanPortfolio**

 

The following table sets forth the scheduled contractual amortizationof our loan portfolio at December 31, 2003, as well as the amount of loanswhich are scheduled to mature after one year which have fixed or adjustableinterest rates.

 
|                                                |   | **Commercial  (1)** |   | **Real  Estate** |   | **Consumer** |   | **Total** |   |
|-----------------------------------------------------|--------|---------------------|--------|------------------|--------|--------------|--------|-----------|--------|
| Amounts due:                                        |   |                |   |             |   |         |   |      |   |
| Within one year                                     |   | $                   | 17,937 |             | $      | 29,106       |   | $         | 4,113  |   | $ | 51,156 |   |
| After one year through five years                   |   | 1,961               |   | 5,154            |   | 159          |   | $         | 7,274  |   |
| Beyond five years                                   |   | 6,289               |   | 17,952           |   | —       |   | $         | 24,241 |   |
|                                                |   |                |   |             |   |         |   |      |   |
| Total                                               |   | $                   | 26,187 |             | $      | 52,212       |   | $         | 4,272  |   | $ | 82,671 |   |
|                                                |   |                |   |             |   |         |   |      |   |
| Interest rate terms on amounts due after  one year: |   |                |   |             |   |         |   |      |   |
|                                                |   |                |   |             |   |         |   |      |   |
| Fixed                                               |   | $                   | 8,250  |             | $      | 18,812       |   | $         | 159    |   | $ | 27,221 |   |
| Adjustable                                          |   | $                   | — |             | $      | 4,294        |   | $         | — |   | $ | 4,294 |   |

 

----

(1)Commercial includes SBA/USDA loans.

 

78

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**Table 6 - Activity in the Allowance for Loan losses**

 

The following table sets forth information concerning the activity inour allowance for loan losses during the periods indicated.

 
|                                                                |   | **Year Ended  December 31,** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                |   | **2003**                          |   | **2002** |   |
|                                                                |   | **(Dollars  in thousands)**       |   |
|                                                                |   |                              |   |   |   |
| **Allowance at the  beginning of the period**                       |   | $                                 | 220    |   | $ | — |   |
|                                                                |   |                              |   |   |   |
| **Charge-offs:**                                                    |   |                              |   |   |   |
| Agricultural                                                        |   | —                            |   | — |   |
| Commercial & industrial loans                                   |   | —                            |   | — |   |
| Real estate loans                                                   |   | —                            |   | — |   |
| Consumer loans                                                      |   | —                            |   | — |   |
| Total Loans Charged-Off                                             |   | —                            |   | — |   |
|                                                                |   |                              |   |   |   |
| **Recoveries:**                                                     |   |                              |   |   |   |
| Agricultural                                                        |   | —                            |   | — |   |
| Commercial & industrial loans                                   |   | —                            |   | — |   |
| Real estate loans                                                   |   | —                            |   | — |   |
| Consumer loans                                                      |   | —                            |   | — |   |
| Total Loans Recovered                                               |   | —                            |   | — |   |
|                                                                |   |                              |   |   |   |
| Net loan charge offs                                                |   | —                            |   | — |   |
|                                                                |   |                              |   |   |   |
| Provision charged to expense                                        |   | 602                               |   | 220 |   |
|                                                                |   |                              |   |   |   |
| Balance                                                             |   | $                                 | 822    |   | $ | 220 |   |
|                                                                |   |                              |   |   |   |
| Average gross loans outstanding during  period                      |   | $                                 | 50,214 |   | $ | 8,318 |   |
| Gross loans outstanding at end of period                            |   | $                                 | 82,671 |   | $ | 25,005 |   |
|                                                                |   |                              |   |   |   |
| **RATIOS**                                                          |   |                              |   |   |   |
| Net Charge-offs to Average Loans  (annualized)                      |   | n/a                               |   | n/a |   |
| Allowance for Loan Losses to Gross Loans at  End of Period          |   | 0.99                              | %      | 0.88 | % |
| Net Loan Charge-offs to Allowance for Loan  Losses at End of Period |   | n/a                               |   | n/a |   |
| Net Loan Charge-offs to Provision for Loan  Losses                  |   | n/a                               |   | n/a |   |

 

79

----

 

**Table 7 - Allocation of the Allowance for Loan Losses**

 

The following table sets forth information concerning the allocation ofour allowance for loan losses by loan categories at the dates indicated.  The allowance for loan losses is availablefor offsetting credit losses in connection with any loan, but is internallyallocated to various loan categories as part of our process for evaluating theadequacy of the allowance for loan losses.

 
|                              |   | **As of  December 31,** |   |
|-----------------------------------|--------|------------------------------|--------|
|                              |   | **2003**                     |   | **2002** |   |
|                              |   | **Amount**                   |   | **% Total  Loans(1)** |   | **Amount** |   | **% Total  Loans(1)** |   |
|                              |   | **(Dollars  in thousands)**  |   |
|                              |   |                         |   |   |   |   |   |   |   |
| Commercial and Industrial         |   | $                            | 146    |   | 17.67 | % | $ | 31 |   | 12.30 | % |
| Real Estate:                      |   |                         |   |   |   |   |   |   |   |
| Commercial                        |   | $                            | 301    |   | 27.54 | % | $ | 72 |   | 37.10 | % |
| Residential                       |   | $                            | 42     |   | 11.08 | % | $ | 9 |   | 6.12 | % |
| Construction and Land Development |   | $                            | 222    |   | 24.54 | % | $ | 76 |   | 40.12 | % |
| Total Real Estate                 |   | $                            | 565    |   | 63.16 | % | $ | 157 |   | 83.33 | % |
|                              |   |                         |   |   |   |   |   |   |   |
| SBA / USDA/ Govt Gtd Loans        |   | $                            | 8      |   | 14.00 | % | $ | 16 |   | 10.19 | % |
| Consumer loans                    |   | $                            | 103    |   | 5.17 | % | $ | 10 |   | 6.37 | % |
| Unallocated                       |   | $                            | — |   | 0.00 | % | $ | 6 |   | 0.00 | % |
|                              |   | $                            | 822    |   | 100.00 | % | $ | 220 |   | 100.00 | % |
|                                   |        |                              |        |  |  |  |  |  |  |  |  |  |

 

----

(1)Represents percentage of loans in category to total loans. 

 

80

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**Table 8 - Securities Available for Sale and Held toMaturity**

 

The following table sets forth our investment securities as of thedates indicated.

 
|                                  |   | **December 31,** |   |
|---------------------------------------|--------|-----------------------|--------|
|                                  |   | **2003**              |   | **2002** |   |
|                                  |   | **Amortized  Cost**   |   | **Fair  Market  Value** |   | **Amortized  Cost** |   | **Fair  Market  Value** |   |
| Available for Sale                    |   |                  |   |   |   |   |   |   |   |
|                                  |   |                  |   |   |   |   |   |   |   |
| US Gov’t agencies                |   | $                     | 24,515 |   | $ | 24,215 |   | $ | 1,134 |   | $ | 1,149 |   |
| Corporate bonds                       |   | 12,032                |   | 12,079 |   | 11,943 |   | 12,244 |   |
| State & political subdivisions    |   | 627                   |   | 619 |   | — |   | — |   |
| Subtotal, Available for Sale          |   | $                     | 37,174 |   | $ | 36,913 |   | $ | 13,077 |   | $ | 13,393 |   |
|                                  |   |                  |   |   |   |   |   |   |   |
| Held to Maturity                      |   |                  |   |   |   |   |   |   |   |
|                                  |   |                  |   |   |   |   |   |   |   |
| US Gov’t treasuries and agencies |   | 6,153                 |   | 6,203 |   | 11,574 |   | 11,699 |   |
| Mortgage-backed securities            |   | 29,674                |   | 29,538 |   | 21,254 |   | 21,416 |   |
| Corporate bonds                       |   | 1,775                 |   | 1,910 |   | 1,771 |   | 1,856 |   |
| State & political subdivisions    |   | 248                   |   | 287 |   | — |   | — |   |
| Subtotal, Held to Maturity            |   | $                     | 37,850 |   | $ | 37,938 |   | $ | 34,599 |   | 34,971 |   |
|                                  |   |                  |   |   |   |   |   |   |   |
| Total Securities                      |   | $                     | 75,024 |   | $ | 74,851 |   | $ | 47,676 |   | $ | 48,364 |   |
|                                  |   |                  |   |   |   |   |   |   |   |
| Fair value as a% of amortized cost of |   |                  |   |   |   |   |   |   |   |
| Held to Maturity Securities           |   |                  |   | 100.2 | % |   |   | 101.1 | % |

 

81

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**Table 9 - Contractual Maturities of Securities**

 

The following table sets forth the contractual maturities and taxequivalent weighted average yields of our debt securities

as of December 31, 2003.  Actual maturities will differ from contractual maturities becauseborrowers may have the right to

call or prepay obligations with or without call or prepaymentpenalties.

 
|                                |   | **Carrying  value Maturing in** |   |
|-------------------------------------|--------|---------------------------------|--------|
|                                |   | **Less than  1 Year**           |   | **1 to 5  Years** |   | **More Than  5  to 10 Years** |   | **More Than  10 years** |   | **Total** |   |
|                                |   | **Amount**                      |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** | ** ** |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available for Sale Securities       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government Agencies              |   | —                          |   | 0.00 | % | 12,970 |   | 2.99 | % | 11,245 |   | 4.29 | % | — |   | 0.00 | % | 24,215 |   | 3.60 | % |
| State & Political subdivisions  |   | —                          |   | 0.00 | % | 490 |   | 2.60 | % | 129 |   | 4.30 | % | — |   | 4.30 | % | 619 |   | 2.94 | % |
| Corporate Bonds                     |   | —                          |   | 0.00 | % | 10,492 |   | 3.38 | % | 1,587 |   | 4.60 | % | — |   | 0.00 | % | 12,079 |   | 3.54 | % |
| Total Available for Sale Securities |   | $                               | — |   |   |   | $ | 23,952 |   |   |   | $ | 12,961 |   |   |   | $ | — |   |   |   | $ | 36,913 |   | 3.57 | % |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity Securities         |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Treasury and Government Agencies |   | 1,505                           |   | 3.60 | % | 1,215 |   | 3.12 | % | 3,133 |   | 5.04 | % | 300 |   | 4.25 | % | 6,153 |   | 4.33 | % |
| Mortgage-backed Securities          |   | —                          |   | 2.36 | % | 3,295 |   | 6.46 | % | 7,715 |   | 3.02 | % | 18,664 |   | 2.95 | % | 29,674 |   | 4.31 | % |
| State & Political subdivisions  |   | —                          |   | 0.00 | % | — |   | 0.00 | % | — |   | 0.00 | % | 248 |   | 6.00 | % | 248 |   | 6.00 | % |
| Corporate Bonds                     |   | —                          |   | 0.00 | % | 499 |   | 6.34 | % | 1,276 |   | 6.75 | % | — |   | 0.00 | % | 1,775 |   | 6.63 | % |
| Total Held to Maturity Securities   |   | $                               | 1,505  |   |   |   | $ | 5,009 |   |   |   | $ | 12,124 |   |   |   | $ | 19,212 |   |   |   | $ | 37,850 |   | 3.50 | % |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment Securities         |   | $                               | 1,505  |   |   |   | $ | 28,961 |   |   |   | $ | 25,085 |   |   |   | $ | 19,212 |   |   |   | $ | 74,763 |   | 3.53 | % |

 

82

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**Table 10 - Premises and Equipment**

 

The following table sets forth the cost and net book value of our fixedassets as of the dates indicated.

 
|                     |   | **As of  December 31,** |   |
|--------------------------|--------|------------------------------|--------|
|                     |   | **2003**                     |   | **2002** |   |
|                     |   | **Cost**                     |   | **Accumulated  Depreciation** |   | **Net Book  Value** |   | **Cost** |   | **Accumulated  Depreciation** |   | **Net Book  Value** |   |
|                     |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Leasehold Improvements   |   | 969                          |   | 103 |   | 866 |   | 969 |   | 45 |   | 924 |   |
| Construction in Progress |   | 30                           |   | — |   | 30 |   | — |   | — |   | — |   |
| Furniture and Equipment  |   | 1,612                        |   | 439 |   | 1,173 |   | 1,394 |   | 144 |   | 1,250 |   |
| **Total**                |   | $                            | 2,611  |   | $ | 542 |   | $ | 2,069 |   | $ | 2,363 |   | $ | 189 |   | $ | 2,174 |   |
|                          |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

83

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**Table 11 - Maturity Schedule of Time Certificatesof Deposit**

 

At December 31, 2003, the scheduled maturities of time depositsincluding IRA’s (in thousands) are as follows:

 
|                |   | **Under  100K** |   | **Over  100K** |   | **Total** |   |
|---------------------|--------|-----------------|--------|----------------|--------|-----------|--------|
| During the Year of: |   |            |   |           |   |      |   |
| 2004                |   | 6,224           |   | 21,840         |   | 28,065    |   |
| 2005                |   | 124             |   | 508            |   | 632       |   |
| 2006                |   | 72              |   | 100            |   | 172       |   |
| 2007                |   | 184             |   | 200            |   | 384       |   |
| 2008                |   | 51              |   | —         |   | 51        |   |
|                |   | 6,656           |   | 22,648         |   | 29,304    |   |

 

84

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**Table 12 - Other Borrowed Funds**

 

The following table sets forth the FHLB advances and other borrowing.

 

# **Other Borrowing**

 
|                                        |   | **As of December 31,** |   |
|---------------------------------------------|--------|-----------------------------|--------|
| **(dollars in thousands)**                  |   | **2003**                    |   | **2002** |   |
|                                        |   |                        |   |   |   |
| Balance at December 31                 |   | $                           | 3,125  |   | $ | 15 |   |
| Average Amount Outstanding                  |   | 617                         |   | 19 |   |
| Maximum Amount Outstanding at any month end |   | 3,125                       |   | 34 |   |
| Average interest rate for the year          |   | 6.25                        | %      | 15.79 | % |
|                                             |        |                             |        |  |  |  |  |

 

**Overnight FHLB Advances**

 
|                                        |   | **As of December 31,** | ** ** |
|---------------------------------------------|--------|-----------------------------|------------|
| **(dollars in thousands)**                  |   | **2003**                    | ** ** | **2002** | ** ** |
|                                        |   |                        |       |   |   |
| Balance at December 31                 |   | $                           | 3,000      |   | $ | — |   |
| Average Amount Outstanding                  |   | 581                         |       | — |   |
| Maximum Amount Outstanding at any month end |   | 4,000                       |       | — |   |
| Average interest rate for the year          |   | 1.09                        | %          | 0.00 | % |
|                                             |        |                             |            |  |  |  |  |

 

85

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**Table 13 - Capital Adequacy - Risk-based Ratios**

 
|                                   |   | **Actual** |   | **Minimum  Capital  Requirement** |   | **Minimum to  be Well Capitalized  Under Prompt Corrective  Action Provisions** |   |
|----------------------------------------|--------|------------|--------|-----------------------------------|--------|---------------------------------------------------------------------------------|--------|
|                                   |   | **Amount** |   | **Ratio**                         |   | **Amount**                                                                      |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| **December 31,  2003**            |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 12,011 |                              | 11.84  | %                                                                               | $      | 8,118 |   | 8.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 14,853 |                              | 14.64  | %                                                                               | $      | 8,118 |   | 8.00 | % | $ | 10,148 |   | 10.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 11,114 |                              | 10.94  | %                                                                               | $      | 4,059 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 13,956 |                              | 13.75  | %                                                                               | $      | 4,059 |   | 4.00 | % | 6,089 |   | 6.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| The Bank Holdings                      |   | $          | 11,114 |                              | 7.06   | %                                                                               | $      | 6,297 |   | 4.00 | % | NA |   | NA |   |
| Nevada Security Bank                   |   | $          | 13,956 |                              | 8.87   | %                                                                               | $      | 6,297 |   | 4.00 | % | $ | 7,871 |   | 5.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| **December 31,  2002**            |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Total Capital to Risk Weighted Assets  |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Nevada Security Bank                   |   | $          | 11,961 |                              | 23.31  | %                                                                               | $      | 4,103 |   | 8.00 | % | $ | 5,129 |   | 10.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Tier 1 Capital to Risk Weighted Assets |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Nevada Security Bank                   |   | $          | 11,679 |                              | 22.76  | %                                                                               | $      | 2,052 |   | 4.00 | % | $ | 3,078 |   | 6.00 | % |
|                                   |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Tier 1 Capital to Average Assets       |   |       |   |                              |   |                                                                            |   |   |   |   |   |   |   |
| Nevada Security Bank                   |   | $          | 11,679 |                              | 15.17  | %                                                                               | $      | 3,079 |   | 4.00 | % | $ | 3,849 |   | 5.00 | % |

 

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**Table 14 - Estimated Net Interest Income SensitivityProfile**

 

The following table sets forth the estimated effects on our netinterest income over a 12 month period following December 31, 2003 in theevent of the indicated shock increases or decreases in market interest rates.

 
|                  |   | **Change in  Net Interest  Income** |   | **Percentage  Change** |   |
|-----------------------|--------|-------------------------------------|--------|------------------------|--------|
| Scenario              |   |                                |   |                   |   |
|                  |   |                                |   |                   |   |
| Up 200 basis points   |   | $                                   | (106   | )                      | -0.06  | % |
| Up 100 basis points   |   | $                                   | (31    | )                      | -0.02  | % |
| Down 100 basis points |   | $                                   | (157   | )                      | -0.09  | % |
| Down 200 basis points |   | $                                   | (488   | )                      | -0.03  | % |

 

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**Table 15 - Interest Rate Sensitivity Gap**

 

The following table sets forth the Company’s interest rate sensitivity.  Interest rate sensitivity is measured as thedifference between the volumes of assets and liabilities subject to repricingat various time periods.

 
|                                                                    |   | **December 31,  2003** |    |
|-------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                    |   | **Within  Three  Months**   |    | **Three  Months to  One Year** |   | **One Year  to  Five Years** |   | **After  5 Years** |   | **Total** |   |
|                                                                    |   | **(Dollars  in thousands)** |    |
|                                                                    |   |                        |    |   |   |   |   |   |   |   |   |
| **Interest Earning  Assets:**                                           |   |                        |    |   |   |   |   |   |   |   |   |
| Federal Funds Sold                                                      |   | $                           | 2,655   |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,655 |   |
| Investment Securities                                                   |   | 500                         |    | 1,005 |   | 28,961 |   | 44,297 |   | 74,763 |   |
| Loans                                                                   |   | 42,668                      |    | 3,093 |   | 10,883 |   | 26,027 |   | 82,671 |   |
| **TOTAL**                                                               |   | $                           | 45,823  |   | $ | 4,098 |   | $ | 39,844 |   | $ | 70,324 |   | $ | 160,089 |   |
|                                                                    |   |                        |    |   |   |   |   |   |   |   |   |
| **Interest Bearing  Liabilities:**                                      |   |                        |    |   |   |   |   |   |   |   |   |
| Interest Bearing Demand Deposits                                        |   | $                           | 7,295   |   | $ | — |   | $ | — |   | $ | — |   | $ | 7,295 |   |
| Savings Deposits                                                        |   | 1,855                       |    | — |   | — |   | — |   | 1,855 |   |
| MMDA’s                                                             |   | 87,019                      |    | — |   | — |   | — |   | 87,019 |   |
| Time Deposits less than $100,000                                        |   | 2,893                       |    | 3,331 |   | 196 |   | 236 |   | 6,656 |   |
| Time Deposits of $100,000 or more                                       |   | 12,030                      |    | 9,810 |   | 608 |   | 200 |   | 22,648 |   |
| Borrowed Funds                                                          |   | 6,125                       |    | — |   | — |   | — |   | 6,125 |   |
| **TOTAL**                                                               |   | $                           | 117,217 |   | $ | 13,141 |   | $ | 804 |   | $ | 436 |   | $ | 131,598 |   |
|                                                                    |   |                        |    |   |   |   |   |   |   |   |   |
| Interest Rate Sensitivity Gap                                           |   | $                           | (71,394 | ) | $ | (9,043 | ) | $ | 39,040 |   | $ | 69,888 |   | $ | 28,491 |   |
|                                                                    |   |                        |    |   |   |   |   |   |   |   |   |
| Cumulative Interest Rate Sensitivity Gap                                |   | $                           | (71,394 | ) | $ | (80,437 | ) | $ | (41,397 | ) | $ | 28,491 |   |   |   |
|                                                                    |   |                        |    |   |   |   |   |   |   |   |   |
| Cumulative Interest Rate Sensitivity  Gap/Total Interest Earning assets |   | -44.60                      | %       | -50.25 | % | -25.86 | % | 17.80 | % |   |   |
|                                                                    |   |                        |    |   |   |   |   |   |   |   |   |
| Cumulative Gap as a % of Total Assets                                   |   | -42.97                      | %       | -48.41 | % | -24.92 | % | 17.15 | % |   |   |

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15 (d) of the Securities and ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
| Dated:  March 26, 2004 | **The Bank Holdings**,  |                  |
|----------------------------------|-------------------------|-----------------------|
|                             | a  Nevada Corporation   |                  |
|                             |                    |                  |
|                             | By:                     | /s/ *Harold G. Giomi* |   |
|                             | Harold G. Giomi         |                  |
|                             | Chief Executive Officer |                  |
|                             |                    |                  |
|                             |                    |                  |
|                             | By:                     | /s/ *Jack B. Buchold* |   |
|                             | Jack B. Buchold         |                  |
|                             | Chief Financial Officer |                  |

 

Pursuant to the requirements of the Securities andExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Signature**         |   | **Title** |                                 | **Date** |                 |
|-----------------------|--------|-----------|--------------------------------------|----------|----------------------|
|                  |   |      |                                 |     |                 |   |
| /s/ *Edward Allison*  |   |      | Director                             |     | March 26,  2004 |   |
| Edward Allison        |   |      |                                 |     |                 |   |
|                  |   |      |                                 |     |                 |   |
| /s/ *Joseph Bourdeau* |   |      | President and Director               |     | March 26,  2004 |   |
| Joseph Bourdeau       |   |      |                                 |     |                 |   |
|                  |   |      |                                 |     |                 |   |
| /s/ *Edward Coppin*   |   |      | Director                             |     | March 26,  2004 |   |
| Edward Coppin         |   |      |                                 |     |                 |   |
|                  |   |      |                                 |     |                 |   |
| /s/ *Harold G. Giomi* |   |      | Chairman and Chief Executive Officer |     | March 26,  2004 |   |
| *Harold  G.* Giomi    |   |      |                                 |     |                 |   |
|                  |   |      |                                 |     |                 |   |
| /s/ *Jack B. Buchold* |   |      | Chief Financial Officer              |     | March 26,  2004 |   |
| Jack B. Buchold       |   |      |                                 |     |                 |   |

 

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